After a slow start to the trading week the big news was that short dollar positions had reached a record low as investors sold the greenback on a broad-based basis. This coincided with long euro positions reaching their highest level since 2008 according to the CME speculative positioning data. While the long euro - short dollar theme was reinforced last week after the ECB President dropped some heavy hints that Euro-area rates will rise next month, when positions get this stretched they can signal a reversal or period of consolidation. So we would be wary at these levels and will wait to see if there is enough momentum in the market to keep this theme going.

The euro easily brushed off news this morning that Greece had been downgraded by a large credit rating agency, who said that Greek fiscal consolidation plans look ambitious when revenue collection is less than expected. However, it also noted that if the mechanisms to improve revenue collection were put in place than the outlook for Greece's fiscal situation would turn around dramatically. EURUSD fell about 30 points on the news but soon clawed back these losses and is currently above the 1.4000 level.

Spain has seen an improvement in economic indicators recently, which has caused the spread between its 10-year government bond yield and Germany's start to narrow. Credit rating agencies remain cautious however, and Fitch lowered its long-term outlook on Spanish debt to negative from stable. The fear is that higher interest rates from the ECB will hurt growth in these countries that won't help fiscal consolidation.

Right now those fears are being played out in the credit markets and the euro remains supported, but this week's EU summit where leaders of the currency bloc will discuss policy solutions to the sovereign debt crisis will be watched closely. There is a growing realisation that radical measures will be avoided and the most likely outcome is that the size of the fund will be increased to its full allotment of EUR440bn. If there are any signs that Germany won't help out its troubled neighbours this could be a major obstacle to the euro sustaining its recent highs as the market has been holding out hope for Germany to reluctantly step in, albeit reluctantly, and provide the financial fire power to bring this crisis to an end.

Elsewhere, it's a fairly light data week, with the Bank of England meeting on Thursday the highlight along with US retail sales for February, released on Friday. The Reserve Bank of New Zealand meets on Wednesday and is expected to cut rates after last month's devastating earthquake. The market is looking for a 25bp cut, but the risk is the cut will be larger after New Zealand PM explicitly said he expected the Central Bank to cut rates to help boost growth. This could weigh even further on the Kiwi dollar, which has fallen 4 per cent since the quake against the US dollar and has sunk to a multi-year low versus the Aussie.

Chinese officials also meet for their 5-year planning session this week. Commerce Minister Chen was speaking this morning about the yuan. He reiterated the official line that the Yuan will appreciate gradually over the long-term and that it was unreasonable for other nations to seek yuan gains for trade reasons. This is likely to rouse the ire of politicians in Washington and keep the focus on the so-called currency war.

Oil is higher as Libya lurches closer to full blown civil war. This is adding to the downward pressure on the greenback, which moves inversely to commodity prices. It is also keeping a lid on stocks, which are only slightly positive in the European session after Friday's gains post the strong US labour market data.

Data watch:
IMF Conference on Macro and growth policies
Former Fed Chairman Volcker speaking in NYC
11.30GMT (0630 ET) EU Trichet speaks at BIS
12.00GMT (0700 ET) EU Rehn speaks on overcoming the economic crisis
13.00GMT (0800 ET) US Lockhart (FOMC Non-Voter) Speaking
14.15GMT (0915 ET) US Fisher Speaking
20.00GMT (1500 ET) US Consumer Credit Last 6.1 Bio Exp 3.4 Bio
23.50GMT (1850 ET) JP M2 LAST 2.3%, ECP 2.3%
23.50GMT (1850 ET) JP Current Account Last 1195.3 Exp 470BN

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Kathleen Brooks| Research Director UK EMEA |

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