The Euro weakened again in Asian trading on Monday with signs of tensions between European Union leaders at the weekend summit while there fears over further severe stresses within regional economies.

The dollar was also boosted by a fresh increase in risk aversion following a new US$30bn support package for insurance group AIG and further downward pressure on equity markets with the major global equities all registering sharp losses.

Provisionally, Euro-zone inflation edged higher to 1.2% in February from 1.1% previously, in contrast to expectations of a further small decline. Markets will still be expecting a significant ECB interest rate cut this week, but there is likely to be some caution.

The US ISM manufacturing index edged stronger to 35.8 in February from 35.6 the previous month, in contrast to expectations of a further decline. The individual components were still very weak with a further decline in the employment index to a fresh multi-year low of 26.1 from 29.9. The employment evidence will increase expectations of a further sharp decline in manufacturing employment in Friday's payroll report and the data still indicates a sharp economic contraction

Elsewhere, construction spending fell by 3.3% in January to the lowest level for close to five years. As Wall Street weakened to Euro dipped to lows around 1.2550, but did prove resilient below 1.26.

Source: VantagePoint Intermarket Analysis Software

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Risk appetite remained extremely fragile on Monday as confidence in the global economy and financial markets continued to weaken. Although the Japanese currency is still finding it more difficult to gain defensive support, it was able to regain some ground, especially as there was further technical pressure for a correction after sharp losses during February.
The domestic data remained weak with a record decline in wages over the year while the Nikkei index weakened by close to 4%. The yen strengthened to near 97 against the dollar before retreating to 97.50.

The yen was unable to gain any sustained support from the weak Dow Jones performance as underlying sentiment remained depressed, although it was resilient on the European crosses.


Sterling dipped again in Asian trading on Monday as trends in risk appetite continued to dominate currency moves. The HSBC group reported a decline in profits and a rights issue, although the main reason for a sharp decline in the UK stock market to six years was a wider loss of confidence in the global banking sector and economy.

The UK PMI manufacturing index fell to near-record lows of 34.7 in February from 35.8 the previous month. Although this was no worse than seen in other major economies, there will be frustration that a sharply improved competitive position was unable to have a significant positive impact on exports.

The mortgage and net lending data was also weak with mortgage January lending only 10% of the levels seen in the same month for 2008.

There will also be additional pressure on the Bank of England to announce quantitative easing at this week's monetary meeting. The final figures from January recorded a monthly increase in M4 money supply of 2.5% for with a 17.5% annual increase, the highest annual increase since 1990. The rate of expansion will increase the Sterling risk of any move to quantitative easing.

Swiss franc

The dollar found support below 1.17 against the dollar on Monday, but was unable to push above 1.18 as franc moves on the Euro cross dampened ranges against the dollar. The franc briefly strengthened towards 1.47 against the Euro as European stock markets fell sharply, but the gains were reversed in New York trade.

The latest Swiss PMI data was weak with a further decline to 32.6 in February from 35.0 the previous month. The data was again worse than expected, maintaining the recent pattern of very weak releases and this will limit franc support.


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Australian dollar

The weaker Australian dollar trend continued in local trading on Monday with lows close to the 0.63 level against the US currency. The Reserve Bank interest rate decision will be watched closely on Tuesday and a further aggressive interest rate cut would be damaging. The bank may well decide to take a slightly more cautious approach which would underpin the currency.

The trends in risk appetite will continue to be watched very closely and will continue to have an important impact with the Australian currency vulnerable if fears increase further. There was support below 0.63, but further selling pressure on Wall Street prevented a significant rally.