President Obama couldn't have wished for a more optimistic platform following a rebound in stocks Tuesday from 12-year lows, as he spoke to lawmakers last evening. Typically upbeat, the President further promoted the role of government as one of leadership rather than control but confirmed the perils of inaction over inaction. The one-two punch of Governor Bernanke's testimony on the hill earlier in the day followed by Obama's support for the banks appears to have soothed market fears that investing in banks won't leave them penniless making nationalization a lower-risk prospect.

The dollar didn't care either way for either performance, rather it spent most of the day fighting off a rebound for stocks and fell against the euro. Overnight, however, the ejection of Ukraine from quality credit to junk status raises further questions over the prospects for the health of the broader Euqozone, which could weaken the single currency further. Currently the euro buys $1.2787 down from $1.2839 overnight.

The British pound is a little weaker today as investors react to the 1.5% shrinkage in the domestic economy in the final quarter of 2008. Over the year the economy shrank by 1.9%. At $1.4315 the pound is down 1.5 cents on yesterday. This is more likely due to a dollar rebound than confirmation of the status of how bad the local economy is. We noted yesterday how the government is leaning on Northern Rock to make mortgage money available to new borrowers to ensure the financial logjam is addressed. Today, one local paper is running a story that the newly-nationalized RBS and Lloyds TSB groups are set to sign agreements guaranteeing assets in exchange for a push to make fresh loans to small businesses and households to the tune of £20 billion.

While that ought to be a positive sign of action (rather than inaction) yet another newspaper article dredges up an EU paper circulated earlier this month to finance ministers warning over the dangers of a slide in the British pound. The paper sounded alarm bells over the precipitous decline in the value of sterling, allegedly compounded by the inaction or apparent lack of concern by the British government. Other EU officials felt that unprecedented currency market volatility causing sharp movements in exchange rates would result in financial instability and result in adverse economic impacts.

The concerns appear to us to be little stretched. On the one hand, if anyone knows better than the Britons about the perils of defending a plummeting currency, please let us know who they are. The EU expressed concern that British exports would suffer if severe weakness in the pound caused strains on the financial system undermining the health of the British economy. Perhaps the EU finance ministers should turn their heads east and their eyes north and look at the state of Japanese export values cascading in waterfall fashion over the edge of an extremely high waterfall these days.

Fears over a competitive devaluation by Britain are a mere side-effect of currency volatility. That volatility is notably absent as we noted yesterday, even though global equity markets are taking center stage for all the wrong reasons. Arguably the local government's lead in pushing nationalized banks to lend is helping to address some of the economic slump. Notably this slump is endemic within the system and not unique to Britain. We wonder whether a slump in the fortune of the euro would promote similar stimulus from Eurozone governments.

The dollar index at 87.59 (March basis) is once again higher by 0.6% today, confirming to us that despite the waves of optimism that show up in intermittent equity market rallies, there is still a strong sense of fear of the unknown apparent. That's showing up in growing demand for the dollar. Watch the performance of Canada and Australian dollars today if the equity markets take back what they stole back from the bears on Tuesday.