The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3035 level and was supported around the $1.2825 level. The common currency has now declined for four consecutive weeks as traders continue to price in additional rate cuts by the European Central Bank. There is also a growing concern that Germany's economy may slow in 2009 more than originally thought. European Central Bank President Trichet today downplayed the possibility of deflation and hinted at further rate cuts. Trichet said the current moves represent disinflation and not deflation and reiterated 2% does not represent the lowest level for interest rates. Trichet also downplayed unfounded speculation that some countries may be looking to leave the euro following recent S&P downgrades to Greece and Spain. Insurance debt default on issues from Spain, Italy, Ireland, Greece, and Belgium have climbed in recent weeks against German bund spreads. ECB member Hurley dovishly said If inflation expectations are revised, the ECB is ready to act. Germany announced overnight that its economy will experience its worst performance in six decades due to a slump in exports and capital investment. Economy minister Glos suggested the German economy fell 1.75% in Q4. At this time, Germany does not appear to be planning a bad bank to manage toxic or underperforming assets. Other German data saw December producer price inflation off 1.0% m/m and up 4.3% y/y. In U.S. news, the January NAHB housing market confidence index printed at +8, down from +9 in December and the lowest level recorded since January 1985. Also, the December ISM non-manufacturing index was revised to 40.1. Also, the ISM manufacturing index was upwardly revised to 32.9 from its preliminary 32.4 level. Collectively, these data evidence a deep contraction in the U.S. manufacturing sector and a significant pullback in the U.S. services sector. Traders continue to monitor the confirmation hearing of Federal Reserve Bank of New York President Geithner who is facing a tough grilling on his nomination to become the new U.S. Treasury Secretary. Euro bids are cited around the US$ 1.2475 level.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥87.10 level and was capped around the ¥90.15 level. Bank of Japan's Policy Board is expected to keep its overnight call rate unchanged at 0.10% tonight but traders are closely watching to see if policymakers increase their outright purchases of Japanese government bonds or enhance liquidity to the troubled corporate sector. Additional purchases of corporate bonds and commercial paper remain likely scenarios. Dealers are also closely monitoring the Ministry of Finance given the yen's ascent to multi-year highs. Yen-selling intervention becomes more likely as the pair drifts lower. Some dealers reported large ¥90 strike came off today and this may have been another impetus for a stronger yen. The Nikkei 225 stock index lost 2.04% to close at ¥7,901.64. U.S. dollar offers are cited around the ¥104.15 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥117.20 level and was supported around the ¥112.05 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥119.35 level while the Swiss franc moved lower vis-à-vis the yen and tested offers around the ¥75.90 level. In Chinese news, China will release 2008 GDP data tomorrow and economic growth may have slowed to 7.0% last year, the weakest pace in nine years.