The dollar gained on the euro overnight to its highest in five weeks as investors continue to defy logic. While the decline to $1.2500 against the euro overnight was compounded by the release of a record increase in European service sector pessimism, the appeal of the dollar as a safe haven against slowing economies clashed with the optimism afforded by prospects for fresh Chinese stimulus measures. Equity investors have once again been lured into a vacuum of selling pressure only to wake today to find a commodity-related rebound lifting stocks higher.

Although the Chinese economy is the only one of the world’s five largest with a positive growth rate, it can’t continue to serve as the manufacturer to the world if the world has stopped buying. President Wen Jibao will address his people Thursday with the equivalent of a state of the nation speech, in which he is now widely tipped to redouble stimulative spending measures following the November earthquakes. At that time some $585 billion was put into motion to help rebuild infrastructure. Today for the first time in five months output and new orders rose in response, while bank lending rose to a record amount as the Chinese banking system had the proverbial gun held to its head by officials keen to see loans increased.

While commodity prices have taken off this morning, investors have brushed off the fact that Australian GDP growth came in much weaker than expected and reversed a sliding Australian dollar, which reached 62.87 overnight. The focus has quickly shifted to prospects for Asian regional growth courtesy of Chinese spending. The Aussie has since ripped up the news flow and torn ahead to 64.38 U.S. cents.

The decision by the Reserve Bank of Australia on Tuesday to keep its benchmark interest unchanged at 3.25% following earlier cuts erasing 400 basis points from its main lending rate, looked decidedly poor judgment in light of fresh economic data from Australia indicating a contraction in the final quarter of 2008. Economists had earlier pointed to a trade surplus that might have highlighted growth for the quarter but the indicator was a false dawn. The Australian markets reacted poorly to the 0.5% contraction in the data, which sent stocks and the local dollar heading south. The government had handed out cash totaling A$8.7 billion to help consumers in December. It appears now that the decision to make cash available helped forestall weaker growth and as a temporary measure undermines the RBA’s decision to leave rates at a standstill yesterday.

The Canadian dollar also gets a reprieve following overnight weakness at $1.2878 against its southern neighbor, with currency speculators all too eager to neglect the deteriorating economic gloom and focus on a jump in demand for commodity dollars. They are also leaving behind them the sentiments expressed by Fed chairman, Ben Bernanke in testimony to the Senate Banking Committee yesterday. He was almost spitting feathers as he expressed frank and forthright views on the risks exposed by AIG, which according to him exploited the regulatory framework taking far more risk than it ever should. Without a fix for the banking system, which clearly his cohorts and political allies have thus far failed to achieve, Mr. Bernanke sounded off a blunt warning that the economy wouldn’t be mended.

Appetite for risk appeared also in buying of the British pound, which is currently higher by three-quarters of a cent at $1.4138. A higher pound will doubtlessly keep Prime Minister, Gordon Brown’s hotel bill more manageable as he visits Washington this week. Earlier, he and President Obama agreed that the any future solution to the global banking system must adopt stricter regulatory requirements in order to prevent a repeat performance. Mr. Brown will also address both Capitol Hill houses to appeal to lawmakers to back Mr. Obama’s steps to lead the way out of the global crisis.

The dollar is taking a rest having pushed higher across the board. We believe the underlying risk aversion theme is alive and well. With a push below $1.25 against the euro and the rise to within a hair’s breadth of $1.30 against the Canadian dollar, it’s hard to blame traders from taking profits and making short-term bets against the greenback ahead of Friday’s employment report. That report is now widely expected to show a rise in the unemployment rate to 8% following today’s worse-than-anticipated ADP report showing that more companies had trimmed back their labor force in February.