Judging from its performance for the week, sentiment has clearly shifted against the U.S. Dollar. While still thought of as the world's reserve currency when the markets are in dire straits, the Dollar ended the weak bruised and battered by all of the major currencies except the Japanese Yen.

Optimism abounded in the markets late in the week which increased demand for risk and led to selling pressure on the Dollar. The strong stock market helped provide some of the optimism as the equities traded as if traders believed a bottom had been reached in the global economy.

The Dollar also weakened on a change in accounting rules in the United States. The change in rules which dealt with how toxic assets are valued helped support the banking sector. Traders sold the Dollar as the banks strengthened and the Dollar lost some of its glitter as a safe haven asset.

The announcement by the G-20 nations to provide at least $1 trillion to emerging markets helped push the Dollar down even further. Although this aid package was not what the U.S. wanted out of the G-20 summit, global traders reacted with enthusiasm as this plan represented a fresh effort by the global community to band together and fight the global economic recession.

Although sentiment may have shifted against the Dollar, traders still have to be concerned about the weakness in the global economy. Lately there has been a peppering of improvements in production throughout the global community, but production only represents a small portion of the economy. There are still issues of unemployment, the lack of consumer spending and most of all, the deteriorating housing market.

In my opinion, production can be something that can be manipulated. Factories can lower production to meet demand. It just takes time to figure out how much demand exists. Don€™t be fooled by improvement in production. There are only improvements when the figures are compared against the new norm. Global production isn't even close to where it was several years ago, and it may take several years if even approach those same levels, if at all.

Just remember the economy bottoms first then recovers. Right now the markets are trading as if the global economy is bottoming, but improvements in employment and housing will be signs that a recovery is taking place. Signs of a bottom in the economy may have put a top in the Dollar, but it is going to take a recovery in the global economy to trigger a longer-term break.

This usually means a strong support base has to be built in the economy before one can get comfortable shorting the Dollar for a long-term move. While the economy is building its support base, the Dollar will be distributing the top. This means there may be a series of retracements to the upside to test the top before the market turns. In other words, don€™t get married to the short-side of the Dollar until it is clear that the global economy is recovering and the Dollar is distributing.

The Euro enjoyed a strong week, but one has to wonder how high the Euro will be allowed to rally before it starts to hurt Euro Zone exports. The ECB in choosing to cut its benchmark interest rate by only 25 basis points has chosen to take this risk.

This week the ECB chose again to set itself apart from the other central banks by keeping its key interest rate above 1.00% at 1.25%. Some feel that the ECB was trying to protect the integrity of the Euro by not weakening it more than necessary. In addition to cutting the rate less than pre-report guesses the ECB failed to announce any kind of alternative plan for stimulating the economy. This also provided support for the Euro.

The British Pound had a strong week as better than expected economic numbers and a successful gilt auction helped provide support. Greater demand for higher risk assets and the strong global equity markets also helped keep the pressure on the upside.

Late in the week a report showing that the contraction rate in the services sector was slowing provided some encouragement that the U.K. economy may be bottoming. The key point to remember is it may be a sign of a bottom but not a recovery. Until housing, spending and employment start to show slower rates of contraction don€™t get too aggressive on the long side of the GBP USD.

The Japanese Yen lost more ground to the U.S. Dollar this week. Bad economic reports and the lack of desire to prevent a free-fall in the currency by the Bank of Japan and the government are reasons to believe the Yen will continue to break further.

Its reliance on other economies to stimulate its economy is a major reason why the Japanese economy is going to have a hard time recovering from this current global recession. With the exception of China, which is experiencing an economic slow down, all of Japan's major customers are going through recessions. Don't expect a turnaround in the Japanese economy until its trading partners such as the U.S. and Europe start to show recoveries of their own.

Japanese investors are also chasing higher yields around the world to offset the low yield offered in Japan. Part of this week's rally in the stock market was no doubt fueled by demand from Japan. Chasing yield weakens the Yen because traders sell it to convert to the higher yielding currency. Continue to look for more downside pressure.

The USD CHF has been under pressure since the Fed announced its plan to buy government bonds and mortgages. This date was March 18 and it appears to be an important turning point. Although there was a two-week rally to give the market a chance to absorb the size of the initial sell-off, it looks as if the USD CHF is ready to resume its downtrend.

One thing that has been limiting the break in the USD CHF has been the threat of an intervention by the Swiss National Bank. Limitations on a country devaluing its own currency were agreed upon at the G-20 meeting. This news may open up the market to a further decline.

Look for more weakness to develop in the USD CAD as the desire for more risk should keep driving the stock market higher as trader confidence in a global economic recovery increases. Thoughts of the global economy bottoming, is also fueling speculation in the crude oil market that a recovery will lead to greater demand for energy. Both of these factors are helping to lead the Canadian Dollar higher.

Overly aggressive traders still have to be careful playing the long side of the Canadian Dollar too aggressively as signs of an economic recovery have not showed up in greater demand for crude oil yet. Furthermore, the Bank of Canada has dropped hints of a 50 basis point rate cut later this month and the announcement of a plan to implement quantitative easing. These two factors could limit gains.

The Australian Dollar had another strong week following the bullish move in the global equity markets. Although the AUD USD is moving higher, economic numbers have yet to reflect any reason for these gains other than greater appetite for risk. Increased exports would be the best sign of the beginning of an economic recovery since the Aussie economy relies on exports.

If the rally cannot be justified with strong economic numbers then look for the Reserve Bank of Australia to take action to revive the economy. The RBA has room to cut rates but feels that a rate cut takes too long to work through the economy. This means a possible attempt at quantitative easing.

The RBA is also concerned about the sudden rise in the AUD USD. The higher the Aussie rallies, the more expensive Australian goods appear to foreign buyers. A slowdown in exports because of a higher Aussie Dollar would be another reason to expect the RBA to find a way to push down its value.

The Aussie is likely to continue to rally as long as equities and commodities continue to post gains. The pace of the rally could slow as traders begin to feel pressure from the possibility of action by the RBA to keep prices lower.

The New Zealand Dollar is in a similar position as the Aussie Dollar. The quick rise in the NZD USD may have made New Zealand goods too expensive which would hurt exports. A cut in exports would have a negative influence on the Reserve Bank of New Zealand's attempts to revive the economy.

The RBNZ is already on record as saying it is going to slow down the pace at which it is going to cut interest rates in the future. This may mean they are going to take more aggressive action at reviving the economy if pushed into that direction. This could mean quantitative easing or perhaps an intervention. An intervention would be frowned upon as the G-20 recently announced an easing at attempts by a country to purposely devalue its currency.

Look for the trend to continue but watch for the rate of the rally to slow down as traders will begin to fear some action by the RBNZ to weaken the currency.

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