Dollar Index: The dollar closed up against the euro yesterday, from the 03:00 EST low of 1.2704 to an intraday high of 1.2899, but closed down from the high at 1.2812 for a net gain of about 100 points on the day.

In a normal world, falling inflation while interest rates are on hold would be a currency-favorable development. Trichet told us that the Feb 05 ECB policy meeting will not consider a rate cut, meaning the members held out cut at the March meeting. But now we have uncertainty over whether policy committee doves could get the hawks to change their minds on the basis of inflation falling faster than they expected. At least one forecaster (UBS London) says a rate cut may be back on the table for February, but remember that Trichet also said that he is worried about a liquidity trap. That's enough to stay the hand of the policy committee.

The situation in the UK is entirely different. The BoE is universally forecast to cut rates on Feb 05 by at least 25 basis points from 1.5% and maybe more, as well as announce unconventional measures of the quantitative easing variety. Today CIPS reported building company PMI dropping to a horrendous 34.5 in January.

Goldman Sachs chief economist O'Neill said The pound is very cheap and you need to make sure that the U.K. is Reykjavik-on-Thames before you bet against the pound. Billionaire investor George Soros said last week that he stopped betting against the pound at 1.4000 and that had a tremendous effect... only proving the point that FX traders are willing to follow sage advice.

The Reserve Bank of Australia cut rates by a full 1% to 3.25%, the lowest since 1964. Policy makers remained dovish, saying that a further decline in inflation was likely. At the same time, the government announced a new stimulus package of A$42 billion, to be focused on infrastructure with some payments to consumers. The Financial Times reported that Treasurer Swan said the fiscal stimulus would help Australia avoid recession by boosting growth by 0.5% in 2008-09, rising to a range of 0.75% to 1% the following year. The International

Monetary Fund at the weekend forecast Australia's economy would contract by 0.2 per cent in calendar 2009.

The Australian government was careful to say it would remain fiscally responsible; As soon as the economy recovers and grows above trend, the government will take action to return the budget to surplus, Swan said.

The Financial Sector: As a sign that it sees persistent difficulties in the credit and inter-bank lending markets, the Federal Reserve on Tuesday announced the extension through October 30, 2009 of its existing liquidity programs that were scheduled to expire on April 30, along with an extension of the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks to October 30.

The Board of Governors and the Federal Open Market Committee (FOMC) took these actions in light of continuing substantial strains in many financial markets, policy makers said in their statement.

The lending facilities affected include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF).

The extension of swap facilities includes the following central banks: the Reserve Bank of Australia, the Banco Central do Brazil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The Bank of Japan will consider the extension at its next Monetary Policy Meeting.

The CPFF provides a liquidity backstop to U.S. issuers of commercial paper. The MMIFF supports a private-sector initiative to provide liquidity to U.S. money market investors. The PDCF provides discount window loans to primary dealers. Under the TSLF, the Federal Reserve Bank of New York auctions term loans of Treasury securities to primary dealers. The TALF will support the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Under the TAF, Reserve Banks auction term discount window loans to depository institutions.