After resisting a further test of support close to 1.25 against the dollar on Thursday the Euro strengthened significantly over the day.

The Euro was underpinned by speculation that the German government would pledge support for Eastern European economies and this triggered some corrective recovery in European currencies. It may prove more difficult to secure durable support, especially with the German economy still contracting. The currency was also supported to some extent by a tentative improvement in risk appetite as global efforts to support the global economy continued.

The US industrial survey data remained depressed with the Philadelphia Fed index weakening sharply to -41.3 from -24.3 in January and this was the weakest reading since 1990. All the current components were depressed, although the improvement in the six-month outlook index will provide some slight optimism over second-half prospects. Leading indicators also strengthened for the second successive month.

The labour-market data also remained extremely weak with initial claims at 627,000, unchanged from the revised level the previous week, and remaining at the highest level since 1980. Continuing claims also pushed to the highest level since at least 1970, reinforcing the very severe stresses in the labour-market. The Euro pushed to a high around 1.2760, but was unable to sustain a move above the 1.2730 previous support level and edged lower later in US trading as The Dow Jones index tested November lows.

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Following the latest monetary meeting, the Bank of Japan pledged to expand the Commercial Paper buying programme and extend low-cost funding. There was no immediate move to re-introduce quantitative easing and interest rates were held at 0.10%.

The more cautious stance by the bank stemmed immediate selling pressure on the yen, but the US currency was able to consolidate above 93. The extent of increased fears over the Japanese economy was illustrated by a rise in credit default swaps on government bonds to a five-year high and confidence in the yen as a safe-haven currency has weakened.

There will still be some caution over the risk of capital repatriation and selling is liable to be contained unless there is a sustained recovery in global risk appetite or a direct move by the authorities to weaken the currency. The dollar pushed back to near 94.50 in US trading.


Sterling found support above 1.42 against the dollar on Thursday and pushed to a peak above 1.44 as the UK currency tracked the Euro advance against the dollar. Sterling was unable to break Euro support levels close to 0.88 against the Euro and weakened in US trading on speculation over strong institutional Euro demand.

The UK government registered a small net budget surplus for January, but this was the weakest January data since 1995 as spending commitments rose while tax revenue weakened sharply.

There was a reclassification of the data which triggered a substantial revision to the December data while the assumption of bank liabilities will increase the debt burden by at least GBP1trn. The underlying deterioration will remain an important negative factor for the UK currency.

The retail sales data will be watched closely on Friday and is liable to trigger fresh volatility, although the impact may be short lived given low confidence in the data.

Swiss franc

The franc was able to resist losses beyond 1.18 against the dollar on Thursday, but the advance was related to the US setback rather than franc demand. The Swiss currency weakened to beyond 1.49 against the Euro.

The franc was undermined initially by speculation that a ruling against UBS would trigger a reform of Switzerland's banking legislation which could trigger substantial capital outflows. A stronger trade reading for January provided some relief as exports rallied.

The Eastern European developments will remain in focus and easing of stresses will tend to lessen immediate demand for the franc. Underlying confidence in the Swiss banking sector will still remain fragile and a potential medium-term negative influence on the Swiss currency.

There will also be speculation over action by the National Bank to weaken the Swiss currency which will curb support.

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Australian dollar

Risk appetite secured a tentative recovery on hopes that US policy action will underpin the economy and this was a positive influence on the Australian currency. The gains in gold prices were also a positive factor for Australia and it moved above the 0.64 level against the US currency on Thursday.

The recovery extended to above the 0.65 level before the local currency weakened as the very poor US manufacturing data dampened sentiment.