Market liquidity will be lower on Thursday ahead of Friday when European markets will be closed for the Good Friday holiday. The dangers posed by reduced liquidity were illustrated last year. On the equivalent Thursday in 2008, the Euro weakened by 240 pips during the day as a serious dollar shortage developed as demand spiked higher at a time when supply was limited. Central banks have been more aggressive in supplying dollar liquidity this year and this should lessen the risk of a repeat performance, but there will be clear dangers. If the dollar does gain strongly, then there will be a clear opportunity to sell it late on Thursday as the move would be likely to reverse early next week.

The Euro dipped to lows around 1.3225 ahead of the US open on Tuesday. Risk appetite remained slightly weaker and this remained a negative factor for the Euro as dollar selling eased. There was, however, a further small decline in 3-month dollar Libor rates which suggests that money-market tensions have not escalated at this stage and this should limit immediate defensive dollar demand.

Overall confidence in the Euro-zone economy remains generally fragile with fears over the cyclical and structural outlook. GDP for the fourth quarter of 2008 was revised down to show a contraction of 1.6% from 1.5% previously. The Irish government was forced into an additional budget to tackle the severe fiscal deterioration which reinforced fears surrounding the weaker Euro-zone members. There will also be further speculation that the ECB could intervene to weaken the Euro.

Corporate fears increased with a larger than expected quarterly loss from Alcoa and further speculation that GM would enter bankruptcy.

It will still be difficult for the major currencies to make a decisive move given the underlying vulnerabilities in both economic areas. The Euro dipped to below 1.32 on Wednesday as risk appetite was still generally weaker.