Tuesday's rally in the euro to a peak of $1.3070 was inspired by optimism over the U.S. economy or some sense that a successful rescue package would soon be delivered. In today's session traders get to focus on the real issue at stake in terms of valuing the euro, which is the set of conditions in and around Europe. As investors cut to the chase they realize that the slowdown in domestic retail sales is a bad thing and they distinctly don't like the whiff of the downgrade doled out by Fitch across Russia's debt ratings. As a result, the euro traded towards $1.2800 Wednesday and once again looks wobbly. Add in the reality that stock markets rallied and are looking perky again this morning and you can tell that the euro's decline is not simply due to an increased sense of global risk.

The Russian debt-downgrading once again highlights the strains within the European financial system with weaker commodity prices playing no small part. Ongoing pressures on a variety of eastern European currencies including the Hungarian forint are merely a sideshow to this point. The implications for deeper declines in aggregate demand stemming from a desire to hoard credit are clear. Russia as an important trading partner means that this downgrade cannot do one jot of good for the larger Eurozone in the grand scheme of things.

The prospects for the British pound continue to conflict with its price action. Investors had to discern whether the impact on the euro stemming from the Russian downgrade would outweigh today's news of the ninth consecutive decline in U.K. service activity, and whether it would harm the pound. Ultimately the pound won and rose against its European counterpart from 90.16 British pennies to 88.90 versus a single euro. Against the dollar the pound also rose close to $1.4500 before giving back some. The counter-intuitive news tells us that some shorts still have to wrestle their way out now that the freefall appears to be over.

The Senate disapproved of augmentations to President Obama's $700 billion financial package and that shifted traders to buy more yen. Against the dollar the Japanese unit is finding it tough to penetrate 88.75. We suspect that more equity-related weakness will result in a challenge on the double-bottom set in December and January at around 87.12. The wave of yen buying was pronounced against the Aussie dollar where traders had a revulsion against the earlier reversion to risk appetite. We expect to see the insulin-kick that inspired Aussie strength wear off as the domestic spending package becomes old news. Instead of buying ¥58.17 the Aussie today only buys ¥57.42. The weakness was accompanied by news of an 18% year-over-year decline in the sale of cars and trucks for January, while home building approvals slid for the sixth straight month. Both pieces of news stole the thunder from the huge rebound and retail sales, which jumped 3.8% as opposed to an expected 1.4% gain.

The Swiss franc continues to lose ground against the dollar at $1.1580 today from $1.1424 Tuesday. Investors in the Swiss franc have been forewarned by the SNB that they have unlimited resources to prevent its rise over time, while simultaneously the proximity of the surrounding Eurozone and clear implications for demand here are apparent.