p>The big currency driver of the day in the European session was the breaking FT article resurrecting the thorny issue of whether U.S. treasury debt might lose its mojo in the form of a downgrade to its AAA status. The article was written by a former Comptroller of the Currency, David Walker. Before the financial crisis Moody's warned over the government's ability to control healthcare and social security spending, and of course the situation has spiraled in the direction of a nasty abyss since then. You can blame the banks and not the government for this current round. However, a downward revision to March retail sales in tow with a weaker than expected April reading have reversed ongoing dollar weakness over the past few days. Investors are increasingly suspicious of the strength of any economic recovery.

Warnings from the Chinese premier recently about America 's fiscal position and warnings over its financial health have been coupled with anecdotal evidence from the rising cost of insuring against default risk on U.S. treasuries. At one point recently notes Mr. Walker, it was less costly to insure McDonalds bonds against possible default than it was to insure against U.S. government issues. Mr. Walker says that two events would cause the loss of the top-notch credit rating in place since 1917. Failure to rein in social security spending post structural reform would debilitate the fiscal health of the nation. Social want would trump financial health. Second, a process must be developed through which the budgetary reins can be yanked so as to address well-known structural imbalances.

The modern financial collapse may have brought closer such structural reform. The social security and healthcare issues Mr. Walker discusses were indeed lurking in the wings and an accident waiting to happen. The government can't continually spend its way out of crisis after crisis brought on my corporate recklessness, constantly trying to win the popular vote by eternally promising lower taxes. It's time to not just wake up but to pony up too in terms of recognizing that America needs to pay more taxes in order to provide for the future. Unless corporations can be persuaded to take the lead and provide for employees themselves, it will rest on government shoulders. Either way someone has to pay and the sooner Joe the Plumber realizes this, the sooner the leaking pipe can be mended.

We don't expect this medium term event to materially affect the performance of the dollar. Indeed in the near term we expect a warming to the dollar as data out turns continue to disappoint the recovery crew. Today the euro is back to $1.3592 and the dollar has risen against the pound to $1.5119. The June dollar index is up 0.4% to 82.76.

In Europe , the light suddenly dimmed again today. Across the Eurozone industrial production through March contracted by 20.2% year-over-year making it the heaviest slide since records began in 1986. While it might be reasonable to sign off on such dire data as capitulation and that this signals the worst of the data, adding concern today was a remark from ECB council member, Marco Kranjec who indicated that it is likely that the ECB would step-up its asset purchase program as well as extend to assets outside of the recently announced covered bonds. Does this underline the point that investors might be conceivably premature in signing off on recession?

In the United Kingdom , central bank governor, Mervyn King adopted a similarly downbeat tone in describing a “protracted recovery” in which inflation might slow to 0.4% and that it was likely to under rather than over shoot the central bank's central premise. More worrying was his sober take that there are “pretty solid reasons” to question the sustainability of the recovery. If this isn't at odds with the recent rally for equities, we're not sure what is.

The Aussie dollar gave up a seven-month high in the Asian session. At first it basked in the warm waters of the continued rally in Asian stocks alongside the FT article discussing the loss of the U.S. AAA-credit rating. But as European and American stocks took the lead the Aussie and other growth-sensitive currencies gave up the ghost with the Aussie declining to 75.95 U.S. cents.