Confidence surrounding the global economy remained extremely fragile over the week with brief spells of optimism unable to gain any significant traction. In this environment, the dollar regained defensive support for much of the time, but exhibited fresh vulnerability on Friday.

The US ISM manufacturing index edged stronger to 35.8 in February from 35.6 the previous month, in contrast to expectations of a further decline. The individual components were still very weak with a drop in the employment index to a fresh multi-year low of 26.1 from 29.9. The ADP report also recorded a further very sharp employment fall of 697,000 for February after a revised 614,000 decline previously.

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The jobless claims data was slightly lower than expected with a decline in initial claims to 639,000 in the latest week from a revised 670,000 previously. The employment evidence overall maintained some hopes that the Friday payroll data may not match the most pessimistic expectations. In the event, non-farm employment fell by 651,000 for the month after a revised 655,000 fall the previous month while unemployment rose to 6.3%, the highest rate since 1983.

Pending home sales falling by a sharper than expected 7.7% for January after a revised 4.8% increase the previous month and mortgage delinquencies rose to record highs near 8% in the fourth quarter of 2008. Construction spending fell by 3.3% in January to the lowest level for close to five years and Fed members warned over deteriorating conditions in the commercial property market.

The Fed’s Beige Book reported that conditions worsened through late February while near-term prospects were poor which certainly tempered any optimism. Fed Chairman Bernanke again took a generally downbeat stance in testimony on Tuesday with a warning of stagflation if the authorities do not act aggressively to stimulate the economy. The Fed chief was also very critical of the AIG activities.

The Euro attempted to rally at times, but was generally on the defensive as economic fears persisted. Confidence in Eastern European economies remained weak which also continued to have a negative influence on the Euro, especially with underlying fears over the European banking sector.

The ECB cut interest rates by a further 0.50% to a record low 1.50% at the latest council meeting. There was also a sharp downgrading of economic prospects in the latest staff projections with the economy expected to contract between 2.2% and 3.2% for 2009 with the bank not expecting significant growth in 2010.

In the press conference following the decision, ECB Chairman Trichet maintained a generally pessimistic stance over the economy. He was careful to note the bank did not decide that 1.50% was the floor for rates which will maintain expectations of further cuts. There was also strong market interest in potential moves towards quantitative measures and Trichet commented that the measures would be discussed.

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The dollar tested 2009 highs beyond 1.25 against the Euro before weakening back towards 1.27 on Friday. The dollar pushed to a four-month high above 99.50 before correcting weaker as exporter selling increased. As risk aversion spiked higher again, the yen strengthened back to near 97 late in the week.

An increase in fear surrounding the global economy and financial sector pushed the Swiss franc to 1.15 against the dollar while it strengthened to 2009 highs near 1.46 against the Euro before correcting weaker.

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The UK PMI manufacturing index fell to near-record lows of 34.7 in February from 35.8 the previous month with weak exports despite the improved competitive position. The construction PMI index weakening to a record low of 27.4 in February from 34.5 previously which increased fears over the housing sector.

In contrast, the CIPS index for the services sector edged higher to 43.2 for February from 42.5, edging further away from the record lows seen late in 2008. The data suggested that the services sector may be holding up better than in the Euro-zone.

The Bank of England interest rate decision was in line with market expectations with a further 0.50% cut in benchmark rates to a fresh record low of 0.50%.

The central bank also announced that it would launch an initial GBP75bn quantitative easing programme by purchasing long-dated government bonds and the total under the scheme could be increased to GBP150bn.

The move to direct money supply expansion was seen as a negative factor for Sterling, although there will also be some hopes that the economy will gain support. Bank of England Governor King also stated that it was very unlikely that interest rates would be cut again which provided some degree of support to the currency.

Sterling had a slightly softer tone against the dollar over the week, but did find solid buying support below 1.40 with a recovery back towards 1.43 on Friday. The UK currency was also resilient against the Euro with good support close to the 0.90 area.