The Euro was unable to gain any traction ahead of the US economic data on Friday and dipped to lows around 1.28 against the dollar. The Euro was undermined again by structural fears with rumours that Greece was set to leave the Euro area. Ireland's credit rating was also put on negative watch.

US GDP contracted at an annualised rate of 3.8% in the fourth quarter of 2008 and this was the weakest reading since 1982, but it was better than the consensus forecast, primarily because of a sharp rise in inventories. Without this increase, the quarterly fall would have been at least 5.5% with severe downturns in housing and investment.

The Chicago PMI index weakened further to 33.3 in February from 35.1 the previous month and the main components remained at very depressed levels with notable weakness in orders which will maintain fears over another depressed national PMI reading next week.

The Euro gained some support after the US GDP data, but then came under renewed pressure with selling a notable feature on the crosses.

The Euro-zone data remained generally weak with the unemployment rate rising to 8.0% in December from an upwardly-revised 7.9% previously. The flash headline inflation rate fell to 1.1% from 1.6% the previous month and compared with expectations of a 1.4% rate. The weaker data will maintain expectations that the ECB will lean towards a further cut in interest rates. Markets will still be sceptical whether there will be a rate cut next week, but the underlying lack of confidence will limit Euro support.


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The latest Japanese economic data was even weaker than expected and continued to signal a very sharp downturn. Industrial production fell by a record 9.6% in December after a fall of 8.9% the previous month as the manufacturing sector remained under severe pressure. The unemployment rate also rose to 4.4% from 4.1% previously while the core inflation rate fell to 0.2% from 1.0% the previous month.

The weak data will increase pressure for further official action to support the economy, especially given deflation fears, while there was also a deterioration in global risk appetite. The Nikkei index fell by around 4.0% while the lack of confidence maintained defensive yen support.

The US currency proved resilient and pushed back towards the 90 level later in US trading as the US GDP data provided some degree of relief with the yen mixed on the main crosses.


Sterling maintained a firmer tone over the day as selling pressure continued to ease. The UK currency resisted selling pressure against the dollar and also gained sharply against the Euro, especially after it pushed through the 0.90 level. There was some easing of immediate fears over the financial sector which triggered a wider improvement in sentiment. Late in US trading, Sterling rallied to 1.45 against the dollar and to near 0.88 against the Euro.

The UK mortgage approvals data was slightly stronger than expected with an increase to 31,000 in December from 27,000 previously. The overall bank lending data was also slightly stronger than expected, although borrowing was still at a subdued level in historic terms. Sterling support is liable to be cautious ahead of Thursday's Bank of England interest rate decision.

Swiss franc

The dollar strengthened to highs jut above1.1650 against the franc on Friday, but struggled to sustain the gains. The franc was again relatively volatile on the crosses with a recovery to highs around 1.4850 after finding support close to 1.50.

The franc moves were again influenced strongly by official comments. The Finance Minister stated that it would support the National Bank if it decided to intervene to weaken the currency and this initially triggered renewed selling pressure on the franc.

Bank Chairman Roth commented that he was comfortable with the franc developments and moves had not been brutal which triggered renewed franc support and it strengthened to near 1.4860 against the Euro in US trading.

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Australian dollar

The domestic data offered no support to the currency on Friday with a decline in private-sector credit for December. These comments increased speculation that there would be an aggressive interest rate cut at the Reserve Bank meeting next week. These expectations undermined the currency and the weak Japanese data also continued to damage risk appetite.

The Australian dollar dipped to lows around 0.6425 as confidence deteriorated. The currency looked to gain ground following the US GDP data, but retreated to below 0.64 as Wall Street weakened and the US currency secured wider support.