The U.S. Dollar closed sharply higher for the week, boosted by a weaker Euro, news that China was tightening its monetary policy and an increase in demand for lower yielding assets. Late in the week, the Dollar flattened out after President Obama proposed restrictions on financial institution trading. The early read is that investors feel the proposal is Dollar negative and in the long-run may discourage investors from buying U.S. assets.

The EUR USD was under pressure all week as concerns about Greece’s budget deficit spiraled out of control as investors began to factor in the possibility of a default. Matters weren’t helped by the European Central Bank and European Union’s refusal to offer any help, although a rumor late in the week seemed to indicate that some sort of loan was going to be made available. This matter is not expected to go away and may even escalate if similar problems develop in Spain and Portugal.

The GBP USD started the week strong, but weakened late in the week after a series of negative economic reports made investors realize that the U.K. economy still has a long way to go to catch up to other major nations. On Friday, it was reported that retail sales were better, but missed analyst estimates.
The USD JPY had a volatile week before finishing sharply lower. Early in the week, the Dollar rallied versus the Yen on better economic news.  Late in the week, however, the Japanese Yen took off to the upside following a huge break in U.S. equities and a shift in sentiment by investors to lower risk assets. President Obama’s plan to curtail trading by financial institutions is likely to make lower yielding assets more attractive to the benefit of the Yen. A rapid rise in the Yen is likely to draw a stern comment from the Bank of Japan which favors a weaker currency.  

The USD CHF finished the week higher, but short-term overbought conditions could lead to a sell-off early next week. The combination of overbought conditions and less demand for the Dollar helped to apply the selling pressure. The Swiss Franc is especially sensitive to the Euro at this time. Watch for a possible intervention by the Swiss National Bank if the Swiss Franc appreciates too much versus the Euro.
The extreme sell-offs in gold, crude oil and equities helped boost the USD CAD for the week.  In addition, the Bank of Canada voted to maintain its stimulus measures which put additional pressure on the Canadian Dollar. The BoC also expressed its concerns with the recent rapid rise in its currency, saying a high value would be detrimental to the economic recovery.

Commodity currencies such as the AUD USD and NZD USD were hit hard this week after it was reported that China asked banks to stop lending money until the end of the year. This served as a sign that China was preparing to implement a tighter monetary policy. Less demand from China is likely to slow down both the Australian and New Zealand economies.
Aussie traders adjusted prices downward in anticipation the Reserve Bank of Australia would leave interest rates unchanged at its next meeting on February 2nd. The Kiwi fell when it was reported that the economy was weaker than expected. This news lessened the chance for a rate hike sooner than the late 2010 target date.

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