EUR/US$

The Euro pushed higher in Asian trading on Monday and extended gains in Europe with another attack on resistance above 1.37 against the dollar.

The Treasury announced over the weekend plans to use US$75-100bn of TARP funds in combination with private capital to boost the potential for assets to be cleared. The plans were confirmed on Monday with the Administration effectively looking to provide a discount for private-sector purchasing of assets with guarantees provided by the FDIC. There was a generally favourable reaction to the plans with strong Wall Street gains also providing Euro support.

Dollar Libor rates did not decline during Monday and the trends over the next few days will be watched closely. If rates do start to decline significantly, then the net impact should be to weaken the US currency.

The US economic data recorded an increase in existing home sales to an annual rate of 4.72mn in February from 4.49mn the previous month. Activity was stimulated by lower costs as prices fell by over 15% over the year while inventories remained historically very high. There will still be hopes that activity has hit a low point which will underpin confidence to some extent.

The Euro was again unable to break tough resistance above 1.37 level with the dollar able to gain some support from hopes that the US economy can be stabilised. The Euro weakened to 1.3550 before rallying back to 1.3640.

ECB members, including Chairman Trichet, have suggested that there is scope for a further reduction in interest rates, but Trichet also expressed doubts over the potential over zero rates and there will be resistance to any further non-conventional measures.

The headline Euro-zone trade deficit increased to EUR10.5bn for January from a revised EUR1.7bn previously. Although the seasonally-adjusted deficit was lower, there was still an important deterioration as exports again weakened sharply and this will increase unease over the impact of Euro strength.

Source: VantagePoint Intermarket Analysis Software
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Yen

Asian equity markets rallied on Monday with optimism that the US financial support plans would maintain the recent more optimistic tone and the Nikkei index rallied to a 7-week high. There was greater confidence in high-yield currencies which increased the potential for capital outflows from Japan.

The yen was also undermined by a break of important support levels against the Euro with the Japanese currency weakening to lows beyond 131.50 with the dollar above 96 despite weakness against the European currencies.

The yen maintained a weaker tone and dipped to fresh five-month lows against the Euro near 132.20 as risk appetite remained stronger. The dollar maintained a firm tone even though there was resistance above 97.

Sterling

The UK strengthened significantly in early Europe with a high near 1.4650 against the dollar and 0.9280 against the Euro. Sterling continued to gain support from the overall improvement in risk appetite with improved sentiment towards the banking sector also a key supportive factor.

Bank of England MPC member took a generally pessimistic stance over the economy and warned that forecasts may still be over-optimistic, especially given the sharp labour-market deterioration. There was, however, an improvement in the latest MORI consumer confidence survey.

The comments from Bank of England Governor King will be watched very closely on Tuesday for further evidence on the economic trends and a pessimistic tone would risk renewed currency selling. After weakening sharply from its best levels, Sterling rallied again as Wall Street extended the advance with risk conditions still very important.

Swiss franc

The Swiss currency was unable to sustain moves beyond 1.12 against the US dollar during Monday and consolidated around 1.1240 in New York. The franc was again unable to sustain gains beyond 1.53 against the Euro.

The franc will tend to lose support when risk appetite improves and the sharp rally in US stock prices was a positive influence.

There will also still be major caution over the threat of National Bank intervention to stem any renewed franc gains.

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Australian dollar

There were renewed Australian dollar gains in local trading on Monday with a challenge on the 0.70 level before a corrective retreat. The currency was boosted by a renewed improvement in risk appetite and a generally weaker US dollar tone.

Overall sentiment is liable to remain firmer in the short term, especially if there are further advances in commodity prices. The currency initially hit tough resistance close to 0.70 against the US dollar, but broke above this level as Wall Street rallied with a peak around 0.7050, the highest level since the first week of January.