As global economic fears intensified and there was further evidence that all main economic areas were in difficulties, currencies generally struggled for direction. Defensive dollar demand weakened early in the week, but equities were unable to sustain the advance and the US currency then regained ground, especially against the continental European currencies.

The US existing home sales data was stronger than expected with sales increasing to an annual rate of 4.74mn in December from 4.45mn the previous month. There was a significant decline in inventories as prices continued to weaken. This combination triggered some optimism that falling prices could boost sales. The new home sales data, however, was much weaker than expected with a decline to an annual rate of 331,000 from a downwardly-revised 388,000. This was the sharpest monthly decline for over 60 years while the annual rate was the lowest since the series began in 1963.


Elsewhere, jobless claims rose to 588,000 in the latest week from 585,000 previously while continuing claims were at a record high. Durable goods orders fell by 2.6% for December with an underlying 3.6% decline for the month which maintained fears over the outlook for capital spending.

GDP fell at annualised rate of 3.8% for the fourth quarter, the sharpest decline since 1980, but this was a slower rate of contraction than expected as inventories increased.

The Federal Reserve left interest rates unchanged at the latest FOMC meeting with a 0.00 – 0.25% range for the Fed funds rate. The Fed also stated that it was prepared to purchase longer-term Treasury Securities if circumstances suggested that this would be beneficial, but drew back from action at this stage.

The House of Representatives approved a US$819bn fiscal stimulus package and attention will now turn towards the Senate. The weak housing data increased pressure for further action to support the economy while banking fears continued.

The Euro was unable to sustain gains over the week as it was dogged by fears over the structural vulnerabilities. A lack of confidence in the global economy also tended to undermine the Euro and it dipped to lows near 1.28.


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The German IFO index edged higher to 83.0 in January from 82.6 previously. The improvement reinforced hopes that the Euro-zone economy may be stabilising, although sentiment remained very fragile. Unemployment rose by 56,000 in January after a revised 33,000 increase in December while the IMF also confirmed that it expected German GDP to decline by over 2% in 2009.

There were further concerns over the outlook for weaker economies as bond spreads continued to edged wider with rumours that countries could leave the Euro area and it was also unsettled by comments from Soros over the risks of the Euro collapsing if bad debts were not addressed.

The Japanese economic data remained extremely weak with industrial production falling by a record 9.6% in December after an 8.5% decline the previous month as inventories continued to rise. Unemployment also rose to 4.4% from 4.1% while the core consumer inflation rate fell to 0.2% from 1.0% the previous month.


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The dollar pushed to challenge resistance levels around 90.70 against the yen over the week, but was unable to break above this level as exporter selling increased above this level. The yen was slightly weaker on the crosses, but was still generally resilient. As growth fears intensified, the Commodity currencies weakened from their best levels.

After heavy selling pressure last week, the UK currency was able to secure some respite, primarily due to a recovery from an over-sold position. There were also comments from George Soros that selling Sterling offered little value below 1.40 against the dollar which helped trigger a covering of short positions.

The latest CBI retail sales survey recorded a small improvement to -47 in January from -55 the previous month., but this was still a very weak report historically and expectations for February were at a record low.

The Bank of England announced that it would buy corporate bonds and commercial paper as part of the GBP50bn financial-support programme. Fears over an expansion of the balance sheet were offset by hopes of an improvement in credit conditions.

The underlying economic fears were still important and the IMF warned that the UK economy was liable to contract around 3.0% in 2009. Fears that the UK will under-perform the global economy continued to be a negative factor for Sterling.

Sterling rallied back above 1.40 against the dollar and pushed to near 0.90 against the Euro.

The important Swiss KOF business confidence index, however, weakened further to a record low of -0.87 in January from a revised -0.45 previously which will maintain a lack of confidence in the Swiss economy.

National Bank chairman Roth stated that interest rates would remain at a low level for a relatively long period of time. He also stated that the franc appreciation was painful and that the bank was watching the situation very closely. Nevertheless, he also remarked that the franc had not overshot yet which strengthened the Swiss currency.

There was significant franc volatility over the week, especially against the Euro. The franc found support close to 1.51 and strengthened towards 1.49. The dollar found support on dips towards 1.13 against the franc.