There are still fears that the Euro is over-valued at current levels while underlying dollar confidence is weak. In this environment, it may still prove difficult for markets to trigger a decisive move with the Euro just above 1.42 in Asia on Wednesday. The dollar will offer medium-term value above the 1.4350 region.

The Euro failed to hold above 1.4350 against the US dollar on Tuesday and dipped sharply during the US session with lows below 1.42 as the dollar pushed to a two-week high on a trade-weighted basis.

The US economic data was stronger than expected with a the ISM manufacturing index rising to 52.9 for August which represented the first reading above 50 for 18 months. In addition, pending home sales rose by a further 3.2% for July, maintaining the run of favourable releases.

There were also powerful influences from the equity markets as prices fell sharply. There were rumours of fresh difficulties within the banking sector which put downward pressure on the market as a whole and triggered some defensive dollar demand as risk aversion spiked higher.

The Euro was unsettled by comments from German Finance Minister Steinbrueck who stated that financing conditions were liable to deteriorate over the next few months.