The dollar's trade weighted index rose to its highest level in three years today as investors responded to a fresh avalanche of dire news. The huge cash call from HSBC, the third bailout for AIG and the thumbs down to Hungary's proposal for financial relief for former eastern European communist countries to the European Union are all enough reason to boost risk aversion today. The dollar is currently building a bear flag against the euro, which is buckling under the added strain of a prospective half percent rate reduction Thursday out of the ECB. A break of the bear flag formation would see the dollar rise to within an ace of the $1.2330 low set in late October.

Not helping the tone today is the release of the European purchasing managers index, which shows continued manufacturing contraction at 33.5 compared to a 34.4 reading last month. The ECB has pretty much already promised a rate cut this month despite some members' views that getting to near-zero on monetary policy is a dangerous situation to get into.

The Australians are also likely to further ease policy this week, while fellow antipodeans in New Zealand will do so next week. Both currencies continue to react a contraction of the external environment. Admittedly the Australian economy appears somewhat cushioned as signs of life are apparent, but at the end of the day Australia can't export its commodities from port to port in wait for global recovery. The Aussie dollar is lower today and buys 63.55 U.S. cents. The Canadian dollar is rapidly approaching further weakness and is close to the top of the U.S. dollar's range at $1.30. The loonie is one and a half pennies cheaper today at $1.2880.

In the U.K. there is more talk of quantitative easing by the Bank of England, with government bond traders fretting over the rising budget deficit. The pound continues to weaken relative to the dollar and today is back to $1.4064 following the news that home prices fell in January at an annualized 10% pace. One survey last week noted that by the end of 2009 some four out of every 10 home owners will owe more in their mortgage than their homes are worth.

The global slump in equity prices appears to be offering a lingering lifeline to the Japanese yen, quite why we're unsure. Investors continue to cling to it as risk aversion increases. The yen is not really rising, but we note that the dollar has for now plucked out about as many feathers as it can. Today the dollar buys ¥97.54.