Markets have again struggled to find a consistent theme over the week and this also led to indecisive trading conditions in the main currency pairs. Weak indicators continued to clash with forward-looking policy responses. Confidence generally waned over the week and this gave the dollar a firm tone as defensive demand remained a feature. Positions were still cut quickly and there were frequent reversals of direction.

US Treasury Secretary Geithner announced the new Financial Stability Plan to support the US banking and wider financial sector. There will be further support of the banks through asset purchases while the Treasury will look to boost consumer credit, potentially with support of over US$1.5trn.


In testimony, Fed Chairman Bernanke took a generally very cautious tone over the economic trends. There were no specific announcements on the buying of long-term US Securities. Congress moved towards approving a slightly smaller US$798bn fiscal stimulus package as the Federal budget deficit continued to rise rapidly. The lack of policy detail from the Treasury and Fed, combined with budget uncertainties, contributed to renewed uncertainty and generally weak risk appetite.

As far as the data is concerned, US retail sales data was stronger than expected with a headline 1.0% increase for January, in contrast to expectations for a further monthly decline, and this was the first increase for seven months. Underlying confidence was still fragile following a revised 3.0% decline the previous month.

The labour-market data remained weak with initial jobless claims falling only slightly to 623,000 in the latest week from a revised 631,000 previously. The extremely high claims level maintained fears over employment conditions and the impact on future spending. There was also a significant decline in business inventories which increased speculation over a downward revision to fourth-quarter GDP while the NAR reported that house-prices had retreated to a five-year low.


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The trade deficit fell for the fifth successive month to a six-year low of US$39.9bn from a revised US$41.6bn. There was a further sharp monthly decline in imports and exports, reinforcing fears over a deep downturn. Although the underlying deficit improvement offered some dollar support, recession fears tended to remain dominant.

The Euro had a mixed tone over the week. There were reports of institutional buying at lower levels which provided some degree of support and it did rebound from medium-term technical support levels against major currencies.

The German trade surplus weakened for December, but the monthly decline in exports was slightly lower than expected at 3.7%. The Euro-zone industrial data remained weak with a 2.6% decline for December with a 12% annual decline which was a record annual fall for the region while business confidence weakened for the month. German GDP fell a sharp 2.1% in the fourth quarter of 2008 with a 1.5% Euro-zone contraction.

There were further stresses within Eastern Europe and this remained a negative factor for the Euro, especially with weak confidence surrounding the financial sector and speculation that Baltic currency pegs would come under further pressure.

There were a series of comments from ECB officials over the week. The tone consistently indicated that there was scope to cut interest rates at the March council meeting with the bank continuing to give very strong policy signals. There was, however, further opposition to a policy of pushing rates towards zero. The Euro weakened to lows around 1.2720 before finding support.

The Japanese currency was trapped in relatively narrow ranges against the dollar over the week with dollar support below the 90 level before a recovery to 91.60. The Japanese currency secured small net gains on the crosses as confidence remained fragile.


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There was some speculation over capital repatriation to Japan given a heavy schedule of US Treasury bond coupon payments. In contrast, there were reports that the postal savings fund was a substantial dollar buyer at lower levels.

Domestic and international influences were both very important for Sterling over the week. The UK unemployment claimant count rose by 73,800 in January after a revised 79,900 increase the previous month which created some relief given fears over an even higher increase. Nevertheless, the unemployment rate was still at a 9-year high.

In its quarterly inflation report, the Bank of England stated that inflation was likely to fall substantially below the 2.0% target in the medium term, potentially with a level of around 0.50% in two years time. Bank Governor King also warned that the UK was experiencing a deep recession as forecasts were downgraded again.

The report stated that there was little scope for further stimulus through interest rate cuts with an increased focus on the possibility of quantitative easing. King stated that this would remain under discussion and that there could be a decision to implement such a policy at the March MPC meeting.

The UK currency weakened to lows near the 1.41 level against the US dollar and 0.91 against the Euro before correcting sharply stronger on Friday with a peak above 1.46.