The G7 meetings failed to announce any new significant policy measures over the weekend with more general comments on the need to tackle the severe downturn. Despite a promise to resist any moves towards protectionism, the lack of policy initiatives had some impact in weakening the Euro in Asian trading on Monday.

The Euro was also unsettled to some extent by fresh rumours of difficulties in Eastern Europe and a possible downgrading of Ukraine's debt rating while there was also some speculation over an Irish sovereign debt default. The internal Euro-zone stresses were illustrated by a further widening of yield spreads between Germany and the weaker Euro-zone members.

The comments from ECB Chairman Trchet were in line with recent remarks and markets remain confident that the bank will lower interest rates at the March meeting with expectations of a 0.50% reduction.

The Euro dipped towards important technical support levels and two-month lows just above to 1.27 in Europe before a slight recovery.

Trading conditions were subdued later in the session with US markets closed for holiday. The Euro was fragile on the crosses and consolidated around 1.2780 as liquidity weakened. Activity in US trading on Tuesday should be more substantial with some important US releases including data on capital flows and net outflows would tend to weaken the dollar.

Source: VantagePoint Intermarket Analysis Software

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Risk appetite was slightly lower following the G7 meetings which strengthened the yen to some extent, but the impact was offset by a more moderate than expected stance on the yuan with a reduction in criticism over Chinese economic policies.

The Japanese economy contracted by 3.3% in the fourth quarter of 2008 with a sharp decline in exports and this was the weakest quarterly performance since 1974. The immediate impact was limited as there had been expectations of a very poor outcome.
Nevertheless, the data will maintain pressure for additional policy responses including intervention to weaken the Japanese currency. The dollar dipped to lows near 91.20 against the yen before rallying to 91.70 while the Japanese currency secured gains against the major European currencies as international confidence remained fragile.


Despite some suggestions of German concerns, there was no public mention of Sterling at the G7 meetings. The UK currency had benefited from a covering of short positions ahead of the weekend and the lack of comment pushed the UK currency weaker in early Asian trading on Monday. There was a retreat to below 1.42 against the dollar in Europe before a recovery to 1.4250. Sterling also found support weaker than 0.90 against the Euro.

A renewed focus on the UK banking sector remained a negative factor for the currency as Lloyds Bank came under further pressure. The CBI also issued a downbeat forecast over 2009 prospects with a forecast that the economy would contract by over 3%.

Bank of England Governor Bean stated that the bank was running out of room on interest rates. He also noted that Sterling's decline would help close the current account deficit and was necessary to rebalance the economy.

Markets will continue to focus on the potential for quantitative easing and a direct expansion of the money supply as this will remain a potentially important source of medium-term Sterling weakness.

Swiss franc

The dollar was unable to sustain a move above 1.17 against the franc on Monday, but found support close to 1.1580. Movement against the dollar was again cushioned by trends on the crosses with the franc gaining ground against the Euro as the Swiss currency tested February highs near 1.4830 in late European trading.

Risk appetite was slightly lower during the day which provided some degree of support to the Swiss economy with fears that the global economy would deteriorate further in the short term. Fears over Eastern European economies will tend to support the Euro.

Source: VantagePoint Intermarket Analysis Software
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Australian dollar

Risk appetite dipped lower following the G7 meetings which undermined the Australian currency to some extent. Domestically, an official from the Reserve Bank stated that the recent Australian dollar decline was welcome and the bank minutes will be watched closely overnight. A negative assessment would undermine the Australian dollar.

The Australian currency will also remain vulnerable to selling pressure if there is a decline in risk confidence while some optimism that there would be a recovery late in the year provided support. With contradictory pressures, the Australian dollar consolidated close to the 0.65 level against the US currency.