EUR/US$

The Euro weakened to lows near 1.3420 against the dollar ahead of the US open on Wednesday, but then secured a significant advance.

The issues of reserve currencies and exchange rate management were again important influences following recent comments from China over the possibility of greater use of an alternative reserve currency such as the SDR

Treasury Secretary Geithner initially stated that the Administration was open to the idea which weakened the dollar sharply, although he then made a series of clarifications that the dollar would remain the dominant reserve currency. These remarks triggered some dollar recovery as volatility spiked higher. The US currency will continue to be very sensitive to any suggestion of reserve diversification.

Any evidence of any improvement in the US economy would tend to lessen the risk that dollar confidence would deteriorate, although it would also increase the risk that defensive demand would fade and there would, therefore, be a mixed influence.

The US new home sales data was slightly stronger than expected with an increase in sales to an annualised rate of 337,000 for February from a revised 322,000 as prices continued to decline. The durable goods orders data was also stronger than expected with a 3.4% increase for February, the first increase for seven months.

The German IFO index edged lower to 82.1 from 82.6 which was a fresh record low for the survey with some optimism in the construction sector while other sectors were more pessimistic. The net impact should be limited with some hopes that conditions may be stabilising. The Euro strengthened to a high around 1.3650 after Geithner's comments before consolidating around 1.3580.

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Yen

The Japanese trade account returned to surplus for February for the first time in five months. The main focus was on the continuing plunge in trade volumes with exports falling 49% over the year. The severe export decline will maintain pressure for any renewed yen gains to be resisted.

Bank of Japan Governor Shirakawa stated that the economy did not face a deflation spiral risk now, but he also stated that he could not rule out a move to zero interest rates or quantitative easing. Risk appetite dipped slightly on Wednesday and this curbed selling pressure on the yen as there was still speculation over Japanese outflows. The dollar was unable to sustain a move above 98.20 in US trading as caution prevailed.

Sterling

Sterling was on the defensive against the Euro during Wednesday on a combination of economic and market fears with lows around 0.9375 while Sterling also registered net losses to around 1.4550 against the dollar.

The UK CBI retail sales survey was weaker than expected as the reading for March recorded a deterioration to -44 from -25 previously and the April expectations component was also weak. The monthly retail sales data will be released on Thursday and the data has consistently been stronger than expected over the past few months as discounting has boosted volumes. Sterling will be at greater risk of selling if this month's data is weaker than expected.

The latest gilt auction reported a bid/cover ratio below 1.00 compared with 2.13 the previous month with potential buyers unsettled by the higher than expected inflation rate reported on Tuesday. There will be increased fears that the UK will not be able to attract sufficient overseas buyers for the very heavy schedule of bond issuance.

Sterling will be vulnerable to significant selling pressure if there is further evidence that overseas buying is fading.

Swiss franc

The dollar was unable to sustain a move above 1.13 against the Swiss franc during Wednesday and weakened back to 1.12 in US trading. The franc maintained a firm tone against the Euro with a challenge on the 1.52 level.

A lack of confidence in all the major currencies will continue to provide some degree of franc support by default

Markets will still be very wary over the threat of intervention to weaken the franc if there are significant gains from current levels.

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Australian dollar

The corrective Australian dollar trend persisted in local trading on Wednesday with a retreat towards 0.6930 against the US currency. There will be further pressures for a correction, although sentiment should hold relatively firm at this stage which will limit the scope for Australian dollar losses unless there is heavy selling pressure on global stock markets.

The Australian currency was unable to sustain a move above the 0.70 level against the US dollar.