The dollar rose overnight and in early U.S. trading breached $1.2800 against the single European currency as investors brace for another round of risk aversion. A stronger than expected showing for U.S. retail sales confused the picture by adding growth prospects to risk aversion as the euro sank to $1.2775. The 'heads I win, tails you lose' news bolstered prospects for both the dollar and the yen as further economic weakness in the Eurozone hampered the appeal of the euro.

The Japanese yen continues to benefit from the deterioration in sentiment and rose against all units overnight as equity prices slipped when investors returned from public holidays. Against the dollar the yen is trading at ¥90.19 from ¥90.47 Wednesday while against the euro the yen has risen from ¥116.60 to ¥115.88.

The dollar today continues to benefit from comments over increased risk aversion across global dealing rooms. Many investors perceive the banking bailout package and the stimulus spending bill to be poorly designed and too little. This risk aversion theme is not entirely the path we had expected the dollar to take, yet the potential for global fallout means that the prospects for the dollar are more rather than less positive.

We had envisaged that the government response to the crisis along with the early mover advantage bringing growth faster to the domestic economy than those abroad would trump the detrimental onset of a yawning budget deficit. After all, deficits are relative and while the U.S. has never faced what's currently on the table in terms of spending, other global governments will be required to stump up relatively large sums creating equal and to some large degree offsetting pressure on their own currencies.

However, the third possible cause of a stronger dollar stems from what we believe will be a continuous stream of negative news from the Eurozone. The fact that today's report showing that December's reading of industrial production fell by the most on record underlines our perspective.

Members of the ECB must be sitting a little uncomfortably looking in the rear-view mirror at the carnage left behind them on Europe's autobahns thanks to its reckless driving. Their failure to lower monetary policy faster and further preferring to ensure they don't blow an airbag en route leaves most of us at our wit's end. As they look at the road ahead of them the picture is worsening. Today the ECB forecast inflation of 1.6% instead of 2% by the end of 2010. While that could be taken as latitude to cut rates further when they meet in March, the flipside is the reduced expectation for GDP growth, which is now expected to come in at 0.6% for 2010 instead of a previous expectation of 1.4%.

Couple this constant ratcheting downwards of weakness in expectations with the ECB's outright incompetence and then compare to the current consensus expectation of U.S. growth next year of 1.9% and the currency choice shouldn't be a hard one.

The British pound too continues to lose out against the dollar today after yesterday's stark wake-up call from the BoE. The 'deep recession' explanation from Governor King has international investors concerned that the printing presses will be cranked up to help spur growth and hearing it directly from the central bank didn't prove too comforting. And while this printing press situation is the same as in the U.S. the pound loses on the risk aversion toss of a coin here. The pound is back at $1.4229 from $1.4385 yesterday. Against the euro the pound is marginally weaker at 89.90 pennies. Traders continue to sell pounds for euros, but we feel here that ultimately the efforts and transparency of the Britons will leave the pound ultimately stronger against the euro.

The commodity dollars are weaker again on the risk aversion theme. The dollar has risen against its northern neighbor to $1.2450 from $1.2418 while a failed government stimulus bill in Australia has dampened sentiment against the Aussie dollar. Earlier the unit strengthened after a government report showed the creation of 1,800 jobs against expectations for 18,000 losses. The Aussie has fallen back to 64.50 U.S. cents against 65.60 on Wednesday.