Fears over the global economy and financial system continued to increase over the week as international data releases remained grim. There were fears that further global weakness would lead to further bad debts within the banking system. In this environment, risk appetite remained lower which triggered further defensive demand for the dollar and yen.

The US economic data maintained a very weak tone. Jobless claims increased to 589,000 in the latest week from 527,000 previously which pushed claims back towards the 26-year highs seen during December. Housing starts weakened further to a fresh 50-year low with an annualised rate of 0.55mn while permits were also at this depressed level.


In congressional testimony, Treasury Secretary nominee Geithner stated that a strong dollar is in the national interest. He also stated that President Obama believes that China is a currency manipulator and called for a realignment of currencies which increased fears that exchange rates would become more politicised.

The Euro was again undermined by debt considerations with Standard& Poor’s downgrading Spain and Portugal’s credit ratings. The losing of its AAA status tended to widen yield spreads over German bunds which reinforced fears over the weaker Euro-zone economies and undermined capital inflows. There were fears that ratings for Italy and Ireland would also be downgraded.

The German ZEW index was stronger than expected with a further recovery to -31.0 in December from -45.2 previously. The prospect of further fiscal support measures had some positive impact on sentiment and the PMI data was slightly better than expected, but the Euro failed to gain any traction.

The dollar retained pushed to one-month highs beyond 1.28 against the Euro as European currencies weakened.


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The Japanese Finance Ministry warned against rapid currency moves, edging closer towards intervention with markets looking at the key 85 dollar support region. The Bank of Japan left interest rates on hold at 0.10% following the latest policy meeting. The bank confirmed that it would buy corporate bonds in the market and also warned again over the economic outlook

The economic difficulties were illustrated by the latest trade data with Japan again running a monthly deficit as there was a severe 35% annual decline in exports.

Despite these domestic fears, the yen strengthened to highs near 87 against the dollar and pushed beyond October 2008 highs against the Euro with a peak near 112. The decline in risk appetite put downward pressure on the Australian and Canadian dollars.

Sterling came under heavy selling pressure for much of the week as confidence evaporated. The banking sector remained a very important focus as the government announcing fresh support measures. As well as an increased equity stakes, there was a GBP50bn programme for the Bank of England to buy securities, effectively a move towards quantitative easing.

There were rumours of a sovereign credit rating downgrade which also undermined confidence, especially as a downgrade would have serious negative medium-term implications for the economy and currency. There were reports that Sterling weakness would be discussed at the February G7 meting and this triggered a sharp short-covering rally as high volatility continued.

UK jobless claims rose by a further 77,900 in December after a revised 83,100 increase previously. The latest government budget data was also weaker than expected with a net borrowing requirement of GBP14.9bn. The CBI industrial survey remained depressed with the orders component weakening further to -48 in January from -35 and overall conditions were at the worst level for 26 years.

GDP recorded a 1.5% decline for the fourth quarter, officially confirming a recession, and this was the weakest figure for at least 28 years. Retail sales rose 1.6% in December as price cutting boosted volumes.

The headline UK consumer inflation rate fell to 3.1% in December from 4.1% the previous month which was higher than expected. Core inflation fell more sharply to 1.1% from 2.0% the previous month. According to the latest minutes, the Bank of England voted 8-1 for a 0.50% rate cut to 1.50% in January. Blanchflower wanted a 1.00% cut, but the majority of members were wary of cutting rates at all which triggered some doubts whether the bank would cut aggressively again in February.

Late in the week, the UK currency weakened to a 23-year low near 1.35 against the dollar while it also weakened to near 0.95 against the Euro.


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Swiss National Bank member Hildebrand stated that the bank could sell an unlimited amount of francs to stop appreciation of the currency. He also stated that the bank must not increase money supply indefinitely, but the comments reinforced market speculation over a more aggressive policy to stem franc appreciation.

The Swiss currency edged weaker against the dollar over the week with lows beyond 1.16. The franc also weakened to test support levels near 1.51 against the Euro, although it gained some fresh support on Friday as risk tolerances dipped again.