The dollar can gain further defensive support in the short term as risk appetite remains low, but the underlying dollar risks are continuing to build.

The US economic data maintained a very weak tone as jobless claims increased to 589,000 in the latest week from 527,000 previously. The move back towards 26-year highs seen in December will maintain fears over the labour market. Housing starts and permits also weakened further to a fresh 50-year low with an annualised rate of 0.55mn for December.

The comments on currencies will continue to be watched very closely in the short term. In congressional testimony, Treasury Secretary nominee Geithner stated in written evidence that a strong dollar is in the national interest. Nevertheless, he also stated that President Obama believes that China is a currency manipulator and called for a realignment of currencies.

These comments will tend to unsettle underlying confidence in US assets and the dollar given the possibility of increased tensions with China and fears that Asian central banks could curb US Treasury buying.

Bond markets will therefore also be monitored closely as any further increase in yields would tend to put further downward pressure on the housing sector which would also maintain a lack of confidence in the wider economy.

The lack of financial confidence remained the dominate feature on Friday with the dollar pushing back towards 1.29 on Friday and the Euro subsequently weakened to below 1.28 despite slightly stronger than expected Euro-zone PMI data.