Overall: The dollar extended the gains seen in the last session, and strengthened into the European trading hours. The currency market was again driven by risk aversion, as investors bought the safety of the dollar. The trend accelerated after the Citigroup stock swap with the U.S. government was announced around 7:30 EST but about an hour later, the futures began to rise and the dollar turned lower. The session was somewhat lackluster once the cash market began trading, as no clear trend evolved but going in to the last hour on Wall Street stocks once again began to head down, and the dollar moved higher against the better-yielding euro, pound and Australian dollar.

In U.S. economic news, real Gross Domestic Product declined at a 6.2% annual pace in the fourth quarter of 2008, the worst quarterly showing for GDP since a 6.4% decrease in the first quarter of 1982. The Chicago Purchasing Managers Index rose slightly to 34.2 in February, but business activity decreased for a fifth straight month. Finally, The Reuters/University of Michigan final index of consumer sentiment fell for the first time in three months to 56.3 from 61.2 in January.

The Euro (Eur/Usd) fell 60 pips during the European session and broke below TheLFB S1 (1.2670), after trading virtually flat in the Asian session. In addition, the euro broke below the 1.2700 support area, which had held the pair for some time. The pair rose as S&P futures improved after 08:30 EST, but fell later in the session as stocks once again declined. Next week, the market expects the ECB to reduce the overnight rate by 50 basis points.

Inflation fell in the Euro-area in January to 1.1% from one-year earlier, in-line with the Flash CPI forecast. The strong declines in CPI sub-indexes helped the inflation gauge reach the 2% target much earlier than forecast. However, the core CPI fell more than expected, 1.6% vs. 1.8%. The unemployment rate in the Euro-area continues to rise. The latest release, for the month of January, shows that the unemployment rate reached 8.2%, more than was expected.

The Pound (Gbp/Usd) traded now just above the 1.4150 support area, which has held the pair since the beginning of February. In the last period, the pound had a very negative reaction to bad news coming out of the U.K. financial sector, so some more selling may not be out of the question. As with the euro, the pair fell after the Citigroup announcement but regained momentum after 08:30 EST, only to fall again later in the session as stocks declined going into the close.

The GfK consumer confidence for the month of February fell to -35 from a -37 reading in January. Confidence in the U.K. that this current economic situation will be over in the next 12 months has risen 8 points, while confidence in the personal household finances has increased by 6 points.

The Aussie (Aud/Usd) fell to TheLFB S2 (0.6400) during the European trading hours, extending the declines first seen in last U.S. session. This level, 0.6400, corresponds to a 4h support trend-line that has held the pair since the beginning of February. The pair moved with the euro and pound, declining late in the session as stocks headed towards their lows for the day.

The Cad (Usd/Cad) traded on light volume in the overnight market. The pair rose 50 pips, testing the 1.2580 area, the high of the last two days of trading. The pair rose for most of the session as crude futures fell nearly 2% on the day.

The Swissy (Usd/Chf) traded flat in the Asian session, but surged 100 pips in the early European session, breaking above TheLFB R1 (1.1715) and the highs of the last days of trading. Also, in the early Asian session, the swissy bounced off the 20-day simple moving average. The pair ended up only slightly lower for the N.Y. session after falling nearly 80 pips after Wall Street got going.

The Yen (Usd/Yen) dropped 130 pips in the overnight market, declining for the first time in the last few days.  Previously, the yen was trading at 3 month high. The pair traded within a relatively tight range in N.Y., finishing the session with a slight loss from where Wall Street began trading.

Japan’s consumer prices have fallen to a flat 0.0 percent reading in January for the first time in over a year as a deepening recession has forced many households to curb spending. Record declines seen in the export market have prompted companies to lay off workers and cut wages, while slowing spending.

Industrial production for January plummeted to a new low for a third consecutive month. The report indicates that production has fallen by 10.0 percent from one month earlier. This indicates that more layoffs are on the way as companies struggle to decrease costs.