The U.S. Dollar closed higher against most majors on Tuesday as weakness in the global equity markets may be indicating a possible short-term top making traders more risk averse. Questions are arising regarding the U.S. toxic bank plan. It looks as if traders are becoming skeptical as to whether this plan will attract enough private investors. Furthermore, the burden on the taxpayer has also become an issue. This is taking some wind out of the sail of Monday€™s currency rally as traders are now thinking that the U.S. economy may not be as well off as originally thought. Some traders once again are flocking to the Dollar as a safe haven alternative investment.

The Dollar stayed strong all day even as the stock market rallied to test yesterday's high. This was a strong indication that traders were not looking for additional risk at this time. The subsequent sell-off in the stock market strengthened the Dollar into the close of the New York session. The rally in the Dollar and the sell-off in the stock market made it clear that some traders were no longer interested in holding on to risky assets.

The Euro was under pressure all day and finished the day near the low of the session. A combination of the stronger Dollar and the realization that the Euro Zone economy is still in bad shape triggered a profit-taking break after the recent run-up.

Traders are also beginning to price in the possibility of an interest rate cut by the European Central Bank. Although ECB President Trichet stated yesterday that he was not in favor of cutting rates to near zero at this time, he may have to succumb to pressure from other policymakers as the Euro needs to weaken to revive the economy.

The tone of the markets throughout the day seemed to be indicating a shift toward safety. Traders who were aggressive buyers on Monday seem to be a little more risk averse today. Demand for higher-risk, higher-yielding assets appeared to be declining throughout the day.

Despite the overall strength in the U.S. Dollar on Tuesday, the British Pound managed to post a strong gain. The GBP USD was up because of higher U.K. consumer prices in February. The rise in the CPI indicates the emergence of inflation but not enough to concern the Bank of England. Based on this small rise in inflation, the BoE is expected to slow down its attempts to lower interest rates further. This means it may curtail plans to apply additional quantitative easing to the market. This is supportive to the Pound.

The stronger Dollar and the weaker stock market had a negative effect on the Canadian Dollar throughout the day. The tone of the market was negative as traders seemed a little more risk averse compared to yesterday.

Monday's rally was attributed to optimism over the Treasury's new toxic bank plan. Now that traders have had some time to analyze the new program, questions have arisen as to whether this is a good idea. These questions are raising concerns in the markets which are leading investors back to the safety of the Dollar.

Recent gains in the Canadian Dollar have been limited by talk of another interest rate cut by the Bank of Canada. If the Canadian bond markets begin to price in another rate cut by the BoC then look for more downside pressure on the currency.

The stronger Dollar put pressure on the Japanese Yen throughout the trading session on Tuesday. The pressure is on the Yen because the Japanese economy is expected to worsen. Traders are treating the Dollar as a safe-haven currency while selling the Yen because the Japanese economy is in shambles.

The Japanese economy is highly reliant on exports. Two major customers of Japan are the U.S. and the Euro Zone nations. As long as consumers in both of these regions are tightening up spending then look for demand for Japanese goods to remain down. This will keep the pressure on the economy.

Do not expect too much from the Japanese government or Bank of Japan as they both favor a weaker Yen.

Traders are once again treating the U.S. Dollar as a safe-haven currency following weakness in the equity markets. This action led to selling pressure on the Swiss Franc. This may actually be a good thing as both the Swiss National Bank and the Swiss government wants to see a weaker currency.

If market forces do not push the Swiss Franc lower then the SNB stands poised to intervene or apply quantitative easing in an effort to weaken the currency.

Weak equity markets and a decrease in demand for commodities helped push the Australian Dollar lower on Tuesday. Traders were also a little less optimistic that the U.S. will pull out of its recession in a short period of time. As equity markets sold off, traders became more averse to risk and sold higher yielding assets.

Traders are beginning to think that the current rally is over as both equity and commodity markets weakened on Tuesday. The Australian economy is not strong enough to support a rally so the AUD USD needs the help of outside markets.

Weakness could develop if government reports show inflation has fallen or production is down. This news will lead to renewed rumors of another rate cut by the Reserve Bank of Australia. Talk of lower rates could put additional pressure on the Aussie and signal the end to this current rally.

The New Zealand Dollar will weaken if it does not get the support of higher commodities and higher equities. In other words investors have to be in the market for more risky investments.

Besides bearish outside market influences, the NZD USD could be under pressure tomorrow if traders begin to liquidate long positions ahead of the New Zealand GDP report on March 26.

Expectations are for the report to show a contraction of 1.1%. Any loss larger than this figure will trigger a sharp break in the NZD USD as traders will begin pricing in another interest rate cut or an intervention by the Reserve Bank of New Zealand.

There are also rumors circulating that the Reserve Bank of New Zealand is poised to intervene if the NZD USD rises any further or prices get too volatile. The RBNZ wants to keep the pressure on the currency to encourage more foreign demand for exports.

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