The dollar is heading back to battling to return to unchanged on the day currently standing at $1.2725 against the euro despite the weakest reading in German business and consumer confidence in 26 years. The Munich-based IFO survey of 7,000 respondents came in at a weaker than expected 82.6 for January. Euro bulls appeared to take solace from the rebound in the expectations component, which rose from 79.5 to 80.9. The real drag on the overall reading was the pain inflicted by the harsh realty of today's economy in which manufacturers continue to shed employees and shutter factories. Currency markets tried to look hard right through the absolute reading but alone couldn't bear the weight of euro sellers.

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Since the early morning release of data, two new data points have emerged. First, the Case-Schiller index of U.S. metropolitan home prices came in slightly weaker than predicted. However, the dollar doesn't need to react negatively to the epicenter of this quake. Second, the sovereign rating of Latvia was revised to junk by S&P ratings agency. Just last week Moody's warned on the potential for fireworks from western Europe's exposure to eastern Europe. The broader dollar index indicates that the U.S. unit continues to forge ahead in this environment.

Many global bourses put in 12-year lows for stocks with every analyst on the street taking a bear view and admittedly little by way of green shoots of recovery to chew on. While equity market volatility picked up a little yesterday to an index reading of 52 for the VIX, it is largely noticeable that the shift down in gears as markets trade fresh lows is accompanied by a growing acceptance of lower valuations. Earnings are down, there are few signs that revenue will increase anytime soon and company after company is slashing its dividend.

Currency pairings are no longer joined at the hip with market descents either. We recently joined the growing chorus of voices pointing out the upward pressure on the Japanese yen was making it a far less appealing place to seek refuge. The growing unpopularity of Prime Minister Aso's government is adding to the gravity of a sharply contracting economy. Tomorrow a likely record trade deficit will again display the demerits of an over valued yen, which now refuses to rally with slumping equity prices. Later in the week, analysts expect the first annual dip in core consumer prices for more than a year. The toll on the country and government finances is highlighted by the jump in credit default insurance on Japanese bonds recently. Implied volatility at 18.7% on yen currency options doesn't tell us that the gyrations in the yen are expected to suddenly widen out.

We do wonder whether the mounting evidence of the detrimental impact of a strong yen will lead to the rebirth of the carry trade. With equities depressed worldwide, the prospects for the yen are so negative that further weakness for stocks ought to be yen negative too, which at the least would shelter losses on Australian or Brazilian stocks when funded through short yen positions. The question is whether an equity market recovery would further relieve pressures on the yen or not. For today the dollar has risen to ¥96.53 against the yen while the euro is firmly above ¥120.00 at ¥122.75.

Other currencies apparently not so joined at the hip with equity market valuations are the commodity currencies of Canada and Australia. We had anticipated that weakness in equities and with dashed hopes for economic recovery that the commodity dollars would be toast. However, the Aussie doesn't seem to want to breach 63.50 U.S. cents and today stands at 64.29 cents. The Canadian dollar has strengthened to $1.2441 overnight.