The dollar has scope for further near-term defensive support on defensive demand and should maintain a firm tone, but the Euro should be able to resist heavy selling pressure from current levels.
The US data releases maintained the weak tone seen over the past week. The main focus was on the GDP data with contraction for the fourth quarter revised up to an annualised rate of 6.2% from the provisional 3.8%. Inventories were revised down and consumer spending fell more substantially and risk appetite deteriorated again after the data.
The Chicago PMI index edged slightly higher to 34.2 in February from 33.3 the previous month. The orders component was little changed while the employment index weakened further. The revised University of Michigan confidence index was little changed at 56.3 for February and confidence in the economy will remain weak.
The Administration formally announced the support package for Citigroup with the authorities taking a bigger stake in the bank. There was an unfavourable reaction from the markets which triggered a fresh increase in risk aversion and this also provided some dollar support against European currencies. The Euro tested levels close to 1.26 before a recovery with the dollar trade-weighted index close to a three-year high.
The Euro weakened again in Asian trading on Monday with signs of tensions between European Union leaders. 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.