Nervous investors played out the typical fear-based scenario on Thursday as demand for dollars and yen picked up in light of an escalation of the drama surrounding the ability of Greece to roll over its debt. Fears over a worsening situation created more selling of the euro and brought into play lock step moves in correlated classes. Investors raised the question over whether the situation might cascade into something worse at a time when perceptions of a rosy economic scenario remain vulnerable to a reversal of favorable factors.

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U.S. Dollar - The afterglow of any number of bullish economic indicators revealed during the last couple of months has driven business and consumer confidence higher, igniting a stock market rally and left economists concluding that the recession really is a thing of the past. Yet the Fed's cautious tone with its epicenter in the housing market has dampened the scenario while yesterday's $11 billion slump in consumer credit gives investors cause to stop in their tracks.

One might expect demand for the dollar to wane in light of a declining weight of bullish scenarios harms the potential for additional yield for the unit. However, by throwing this week's additional confusion over Greece into the mix, the dollar is rising on all fronts except against the Japanese yen.

Japanese yen - The yen continues its ascent against the dollar having fallen to as low as ¥94.75 earlier in the week. An unexpected decline in machinery tool orders during February again highlights the risk of a smooth recovery. Today the yen rose to ¥92.85 per dollar while domestic equity prices gave back over 1% of recent gains. Against the euro the yen surged to ¥123.85 having been as weak as ¥127.80 at the start of the week.

Euro - It's of no surprise to learn that, once again, the euro is being steered by developments in the Greek asset classes. And there is very little positive news coming out of anywhere as the government hunkers down for a tough early summer in which it has o rollover maturing bonds. Prices of outstanding debt continue to slide and have once again sent yields surging. The spread against German debt has widened to the most since the euro was conceived over a decade ago. The cost of insuring against default moved towards the stratosphere leaving onlookers wondering when the gravitational pull would give way to weightlessness. The Prime Minister of Greece told his nation on television that further steps were unnecessary assuming that existing austerity measures were properly implemented.

The soothing words were lost in a capitalist world, where dealers are once again turning up to work the daily grind of dealing with markets in crisis. The euro slipped to $1.3282 before regaining a foothold above $1.3300 after a reprieve from a rise in U.S. jobless figures that raised another question mark about the recovery in process.

Aussie dollar - The addition of 30,100 more full-time jobs in Australia during March depicts a clearly healthy economy. The rate of unemployment remained at 5.3% as the net employment gain showed 19,600 new positions were created. Symptomatic of today's bout of risk aversion the local dollar is down on its luck today and has slipped to buy 92.55 U.S. cents. Despite a huge yield advantage over the U.S. dollar, the Aussie can't manage to break above the 2010 peak created in January at 94.06 cents.

Canadian dollar -The Canadian dollar is trading both sides of parity this morning as the conflicting forces of recovery and caution play out. The risk-on trade has until now manifested itself in a demand for physical commodities clearly evident in rising prices. This week the price of crude oil reached its highest in about 20-months. The clear admission from the central bank that rates are likely to rise this year has bolstered the unit but the sudden bout of risk aversion gives traders reason to defy the drive to parity. On the eve of the national employment report, which is forecast to yield an additional 26,000 jobs, the Canadian unit is currently trading at 99.11 U.S. cents.

British pound - Challenges to trading Britain's pound took another twist on Thursday as data indicating a pick-up in the pace of recovery gave credence to the view that positive economic news favors the labor government. For a third day in a row a YouGov Plc poll showed a decline in the lead of the Conservative opposition party to just 5 points.

Coincidentally, data from February released today showed that both industrial and manufacturing activity blew away market forecasts by expanding at twice the expected pace. Despite this the pound fell in part due to a rising dollar, but also because of the increased uncertainty that accompanies a recovery in the prospects of the government at the national poll in May. The pound is currently trading at $1.5210 and down from an intraweek peak at $1.5320.

Andrew Wilkinson

Senior Market Analyst