Difficulties in securing a decisive market trend were illustrated by renewed Euro selling in Asia on Tuesday following reports that Russian banks were seeking debt rescheduling The dollar strengthened towards 1.2850 and the lack of confidence in the European banking sector will remain a negative Euro factor.

The dollar failed to sustain the gains and weakened back to lows beyond the 1.30 level in New York on hopes that there would be positive US developments. As policy action dominated, the economic data did not have a significant impact. Risk appetite was initially supported by the Senate's approval of a fiscal stimulus plan, although it differs significantly from the House version and a compromise version will be required.

US Treasury Secretary Geithner announced the new Financial Stability Plan to support the US banking and wider financial sector. There will be further support of the banks through asset purchases while the Treasury will look to boost consumer credit. There was a lack of specific details which unsettled Wall Street and pushed the Dow Jones index down sharply with markets also uneasy over the plans for direct lending.

In testimony on Tuesday, Fed Chairman Bernanke also took a generally very cautious tone over the economic trends. There were no specific announcements on the buying of long-term US Securities which also undermined equity-market sentiment.

As risk appetite faded, the familiar currency-market trading pattern emerged. The dollar gained support against the Euro with a push back to around the 1.29 level later in the US session.

Source: VantagePoint Intermarket Analysis Software

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The dollar found support close to 91 against the yen in Asia on Tuesday and initially recovered back to 91.50 but struggled to sustain the advance. Domestically, consumer confidence remained depressed while there was an earnings warning from Nissan which curbed risk appetite and reinforced Japanese economic fears.

Markets will remain on alert over exchange rate comments from key Japanese and international officials with G7 meetings due at the end of this week. There will be some further speculation that Japan will push for yen gains to be capped given the severe industrial stresses and this will tend to restrain the currency.

The dollar was unable to make significant headway in US trading and then dipped sharply to lows near the 90.10 level as Wall Street dipped sharply in line with a deterioration in risk appetite following Geithner's news conference. The yen also remained ground sharply on the crosses with a move to around 116 against the Euro from lows beyond 119.50.


Sterling was unable to mount a further challenge on resistance in the 1.50 level against the dollar on Tuesday while it also hit selling pressure on gains to beyond 0.87 against the Euro.
The UK data offered some support with a surprise 1.1% BRC like-for-like retail sales increase for January. The goods trade deficit was also lower than expected at GBP7.4bn for December from a revised GBP8.1bn previously. Primarily, the improvement reflected weak imports, although the was some degree of support from exports.

The UK unemployment data and Bank of England inflation report will be important for sentiment on Wednesday. A very sharp rise in unemployment would tend to unsettle Sterling, especially with economic forecasts liable to downgraded again, while hints in the inflation report that interest rates will not be cut again would underpin the currency. A key feature is likely to be a sustained increase in volatility.

Risk conditions continued to have a very important impact and Sterling weakened to lows below 1.45 against the dollar as equity market sentiment deteriorated.

Swiss franc

The dollar hit selling pressure above the 1.1750 region on Tuesday and dipped to lows near 1.15 before consolidating above this level. After initial weakness, the franc gained support against the Euro with renewed gains through the 1.50 level as risk conditions deteriorated again.

Swiss consumer prices fell 0.8% in January which pushed the headline inflation rate down to a two-year low of 0.1%. Although the underlying rate was higher, the data will ensure that the National Bank maintains a very low interest rate policy. There will also be further pressure for official intervention to weaken the Swiss currency.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar was vulnerable to a retracement in Asian trading on Tuesday and the corrective pressure was increased by unease over the Russian banking sector with lows below 0.6650 against the US dollar. The domestic data offered no support with a further deterioration in business confidence according to the latest NAB survey.

The Australian currency regained ground in Europe, but the deterioration in risk appetite pushed the currency weaker again in New York with lows below the 0.65 level against the US dollar with sharp losses against the yen. Volatile trading is likely to remain a key short-term feature.