The Japanese yen declined overnight following a pledge form the Bank of Japan to add as much as $10 billion in subordinated loans to the domestic banking system marking the next round of intervention to help the ailing economy in the face of zero room to ease monetary policy further. The dollar rose to ¥98.92 while the euro is trading close to its highest price year-to-date at ¥128.05. Meanwhile the dollar has recovered from weakness against the euro above $1.3050 and is trading back beneath $1.2950 in early morning New York trading.

We are precisely one year on from the collapse of Bear Stearns into the arms of JP Morgan Chase. At the time investors reeling from the sticker shock of $2.00 for Bear’s stock drove equities into the ground, wondering which veritable institutions would be next. One year on investors have rallied around the collective cries from banking CEO’s who have noted that the current quarter has been a profitable one. However, it is important to note that because a patient is sitting up in bed sipping fluids doesn’t mean that he can yet walk.

The nascent recovery theme has led to shenanigans worthy of St. Patrick’s day when it comes to currency realignments. Investors jumped on the wagon of dollar bashing with remarkable speed as they questioned the need to hold dollars. Rising financial stock prices as investor sentiment was encouraged has fed this dollar selling frenzy. And in an interview with Germany’s Handelsblatt newspaper, executive ECB board member, Juergen Stark expresses his view that there really isn’t much more that the ECB can do in terms of cutting rates and he said he’s pretty comfortable where rates are. The ECB is going to have to exercise caution if it wishes to avoid further pressure on its domestic economy from a rising exchange rate. Suffice it to say that financial turmoil is still playing out in the data and so buying euros for the sake of yield will likely end in a similarly short-sighted play as was buying yen for safety’s sake.

Meanwhile, the Australian dollar continues to feed off that positive twin vibe from the Asian region of rising equities and the aforementioned Japanese plan to address banking capital. Once again, faced with ongoing bad economic news, investors continue to feel good about the Aussie, which is at 65.92 U.S. cents today as they discount recovery. We don’t dispute that a recovery is more likely to boost commodity prices, but we do think that such recovery is later rather than sooner. Stable equity prices appear to be reducing expectations that central banks need to ease policy further. This view gave a significant boost to the Aussie dollar before minutes from a recent RBA meeting disclosed yet further for policy to fall. It will be interesting to witness ahead whether central bankers attach increasing weight to sentiment rather than fact.

For the British pound, sentiment took a kicking today after equity markets resumed their slide. Barclays Bank had joined the vocal throng yesterday and so gave optimists further recovery hopes. However, in a rights issue prospectus today, HSBC noted that first quarter results were on-track, which isn’t as positive as other banks have noted. The pound fell back from above $1.41 Monday to beneath $1.40. Home prices fell 11.5% in the year through January making that an unlucky seven straight months for home owners. On Wednesday the government will release jobless data, most likely showing a further rise in the number of people without jobs.