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It was meant to be all about the U.S. and its economy on Friday after we heard from the Bureau of Labor Statistics that the U.S. created 200,000 jobs in December, but yet again Europe managed to steal the limelight. Fears about upcoming peripheral debt auctions for Italy and Spain along with a meeting of Angela Merkel and Nicolas Sarkozy tomorrow dented risk appetite and caused the euro to fall to 14-month lows below $1.27 at one point.

Friday's price action is worth watching: Normally a strong payrolls number is actually dollar-negative as it tends to give a boost to risky assets. The fact that it didn't and the dollar rallied quite sharply suggests a few things. Most importantly, is the dollar becoming a growth currency?

The U.S. economy is proving to be fairly resilient to the problems in Europe, but we still don't think that if we see a Eurozone meltdown then the U.S. would be able to escape unscathed. Thus, we question how long the dollar can act as both safe haven and growth currency simultaneously. Added to this, 10-year Treasury yields fell on Friday as yields on Spanish, Italian and even Austrian bonds surged. So, we need plenty more evidence before we can call the dollar a growth currency, even if its performance on Friday was somewhat unexpected.

Europe, Europe and more Europe dominate the agenda next week. On top of bond auctions and the Merkozy meeting there are European Central Bank and Bank of England meetings on Thursday. We expect these to be fairly uneventful with both banks in wait-and-see mode. Although we think that the ECB may cut rates to record lows we believe it could wait until March to do so.

Mario Draghi is likely to continue to keep his powder dry regarding quantitative easing of any type from the ECB, yet we expect to hear more about how successful he viewed the first LTRO long-term auction that banks sucked up with glee. We also want to hear about how happy the ECB is with banks depositing their funds with it on a daily basis at a record euro-era rate. He will probably say that it is too early to say whether the LTRO worked or not and if some of the liquidity will feed throw to the sovereign market, however as long as strains remain in Europe's sovereign markets then the banks are in trouble and risky assets are exposed to weak levels of investor sentiment.

So as we move into the second week of January, the same old problems continue to fester: no resolution to the Eurozone crisis and escalating fears concerning sovereign debt auctions and inter-bank lending.  We should also see some further traction in the U.S. economy as retail sales are released this week, with heavy holiday-season discounting likely to have attracted decent consumer demand. The Fed's Bullard said that QE 3 was certainly not round the corner for the U.S. as signs of growth get stronger, but he said that the Fed's plan to announce all Fed members' estimates for future interest rates, which will be first published at the its meeting later this month, was right to be attracting scepticism and may be adjusted throughout the year.

Could the euro rebound this week? It had an enormous move on Friday, so we wouldn't be surprised especially since the market is so short euro already. However, we might be range-bound around the 1.2680-1.2850 mark until we know how the Italian and Spanish bond auctions go. January is proving to be a fairly lively month so far.

Kathleen Brooks| Research Director UK EMEA |

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