The Euro was unable to make any significant headway on Wednesday and drifted weaker for the third successive session. The Euro weakened to lows near 1.25, the weakest point for over 10 weeks as risk appetite remained generally fragile.

The Euro was again unsettled by fears over the Eastern Europe outlook and threat of further credit-ratings downgrades while confidence towards the banking sector also remained weak amid fears over further debt write-downs.

The US economic data was generally weaker than expected and continued to illustrate that the economy faces a further sharp contraction for the first quarter of 2009. Housing starts fell by a further 16.8% in January with the annual rate at a record low of 0.47mn from 0.55mn the previous month while building permits declined to 0.52mn from 0.55mn. Industrial production fell by a further 1.8% for January while capacity use declined sharply again to 72.0% from 73.3%.

According to minutes from January's FOMC meeting, confidence in the 2009 outlook deteriorated further with fears over the commercial-property sector and there was no indication that the housing sector was stabilising.

President Obama signed the fiscal stimulus bill overnight and there were hopes that fresh plans to ease mortgage difficulties would help improve conditions.

The 2010 Fed growth projections were revised higher, but market confidence and risk appetite will remain fragile in the short term with some further defensive dollar support as future hopes are countered by severe short-term weakness.

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The Japanese currency continued to struggle to gain any support from fragile risk appetite during Wednesday even with equity markets on the defensive. The domestic stresses were illustrated by moves in the debt default swaps with the cost of protecting against a Japanese default on government debt at a record high.

There will still be some expectations of capital repatriation to Japan ahead of the fiscal year end which will provide some yen protection. The dollar was holding just below 92.50 in early Europe on Wednesday and then strengthened to a high close to 94.0 in New York.

The yen was undermined in part by speculation that the Bank of Japan would announce further measures to boost lending and return to a policy of quantitative easing to help stabilise the economy. The yen will lose further ground if there is aggressive central bank action on Thursday, especially if they cut interest rates to zero while a more measured stance would tend to provide renewed yen support.


Euro-zone economic fears will continue to provide some UK protection and Sterling initially edged stronger on Wednesday.

The Bank of England minutes were in line with expectations with an 8-1 split for the 0.50% reduction to 1.0% with Blanchflower voting for a larger 1.0% cut. There was 9-0 vote to seek government approval for quantitative easing and this policy will tend to undermine Sterling given the serious implications for medium-term price stability.

The currency was also undermined by renewed speculation that the AAA credit rating could be downgraded with a retreat towards a two-week low of 1.41 against the dollar. The economic data provided no support with the CBI industrial survey weakening further to -56 in February from -48 and this was the lowest reading for 17 years as overseas demand deteriorated.

Sterling proved resilient to further selling pressure and recovered back above the 1.42 level while it also strengthened to near 0.88 against the Euro.
Swiss franc
The dollar continued to push higher against the Swiss franc on Wednesday with a peak close to 1.1825 . The franc was unable to extend gains beyond 1.47 against the Euro, although it did consolidate stronger than the 1.48 level.

There were reservations over the potential for National Bank intervention to weaken the franc and this curtailed franc support.

Developments surrounding Eastern Europe will still be watched very closely as further tensions would tend to provide defensive franc support with the possibility of strong buying support.


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Australian dollar


The Australian dollar dipped to lows around 0.6330 against the US currency on Wednesday, before rallying back above 0.64. The currency will remain vulnerable if risk appetite deteriorates, but there will be support from the gains in gold prices and hopes that the Chinese economy can recover.

The Australian currency again found support close to the 0.6330 level and pushed back to near 0.64 in US trading as precious metals continued to advance. The Australian dollar should gain near-term support if there are further policy actions by the Bank of Japan to boost money supply.