Dollar strengthens against sterling

An increase in risk aversion resulted in strengthening of the dollar against most major currencies. The dollar benefited from safe haven flows yesterday as major equity markets slumped deep into the red on increasing fears about the ongoing financial turmoil. Sterling fell 3% against the dollar following Moody’s downgrade of Barclays and more gloomy economic data, and as investors brace themselves for another interest rate cut from the Bank of England.

There are several significant announcements taking place in the US today including MBA Mortgage Applications and the Import Price Index. In the UK, CBI Industrial Trends Survey data will be released at 11.00 GMT.

Euro falls to 2 month low against US dollar

The euro fell below 1.26 against the dollar for the first time since early December yesterday, after Moody’s said it may cut the ratings of several banks with units in Eastern Europe, adding to concerns that financial turmoil may deepen. Eastern European banks, which are mainly subsidiaries of financial institutions based in Austria, Italy, France, Belgium, Germany and Sweden, are likely to come under “downward pressure” that may weaken their parent companies. It is therefore likely sentiment on the euro will become increasingly bearish as the financial downturn deepens.

The dollar also gained support as stock markets fell yesterday, which made the US currency more attractive as a safe haven.

Construction Output data is released in the eurozone this morning, while MBA Mortgage Applications, Housing Permits, Import Price Index and Industrial Production figures are released in the US this afternoon, in addition to the minutes from the recent Federal Open Market Committee Meeting.

New Zealand dollar battered by risk aversion

The New Zealand dollar was battered against the pound yesterday as tumbling stocks pushed investor risk aversion higher. Fears of a downturn in Europe and further weak data out of the US had demand for higher yielding currencies fall sharply. With only second tier data due over the next few days the kiwi will be lead by global market movements.

Aussie dollar tumbles

The Australian dollar tumbled against sterling yesterday, as fears about recession kept investor risk aversion high. Stock markets fell, largely dragged down by the banking sector over the EU's potential exposure to Eastern Europe’s shaky banking sector. Data yesterday revealed a smaller than expected fall in British inflation, but this is unlikely to impact on the BoE’s monetary easing. The BoE releases the minutes from its last meeting later today, although it is unlikely to have the same impact as previous releases. This is due to last week’s inflation report and comments from BoE Governor Mervyn King that further policy easing was likely.

Polish zloty nears all time low against the euro

The Polish zloty neared an all time low against the euro today over fears of souring currency options at Polish firms and rising concern about Eastern Europe's reliance on foreign debt.

Moody's rating agency said the accelerating recession in Eastern Europe will be more severe than elsewhere due to large imbalances, and it could threaten the ratings of local banks and their western parents. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of all bank loans in Central and Eastern Europe.

Sentiment on the zloty has also been undermined by a Polish central bank report casting doubt on Warsaw's plans to adopt the euro in 2012 – since the report was published on Friday the zloty has fallen more than 8% to 4.9307 per euro, near the all-time low of 4.9453 reached in March 2004.

Dollar rises against the pound amid thin trading

Trading was thin on the ground yesterday as US markets were closed for President’s Day. The dollar rose against the pound on the back of risk aversion which caused investors to flock to the safe haven of the dollar. Additionally Japan announced on Monday that growth had fallen by more than 3% in the last three months of 2008, the worst result in 35 years. The pound remained weak predominantly due to the fact that the G7 meeting failed to refer to it at the weekend. It is also expected that sterling will weaken further today in anticipation of a report due out which is expected to show a slowdown in inflation in the current bleak economic situation.

There are several significant announcements taking place in the US today including the NY Empire State Manufacturing Index, TIC Flows and the NAHB Housing Market Index. In the UK, Consumer Price Index, House Price Index and Retail Price Index data will be released at 09.30 GMT.

Pound remains under pressure against the euro

In a quiet day for trading, the pound remained pressurised against the single currency as concerns over Lloyds Banking Group heightened banking sector worries and after the Group of Seven finance ministers made no comment on the currency. Indeed, rating’s agency Moody’s downgraded Lloyds senior debt to A1 from Aa1 and the group’s financial strength rating form B+ to C+, confirming the major concerns surrounding the bank at present. News out of the eurozone was little better as it was revealed that the European Commission will launch disciplinary steps against France, Spain and Greece for exceeding the EU’s budget deficit limit of 3% of GDP.

The major news this morning will surround the UK’s inflation figures and ZEW releasing their economic sentiment survey within Germany.

Euro falls to 2-month low against the dollar

The dollar rose across the board yesterday, pushing the euro to a two month low amid concerns about a recession in eastern Europe and the knock-on effect on European banks. Credit rating agency Moody's said the recession in Eastern Europe was likely to be more severe than elsewhere and would put credit ratings of local banks and their Western parents under pressure, fuelling investor jitters about the region. The report stoked euro selling which, along with investor risk aversion, helped propel the dollar higher against the euro, the yen and the pound.

The German ZEW Economic Sentiment survey is released this morning and Trade balance figures are also due from the eurozone. In the US Total Net TIC Flows, ABC Consumer Confidence and Empire Manufacturing data are released this afternoon.

Australian dollar weakens slightly against the pound

The Australian dollar weakened slightly against sterling yesterday, in subdued trade due to a US holiday. The aussie remained weighed down by risk aversion after the weekend G7 meeting and concerns over Japan heading into recession. Today investors will eye key UK inflation data for further direction. Analysts expect the January figure to fall from 3.1 percent to 2.7 percent.

New Zealand dollar remains on the back foot

The New Zealand dollar remained on the back foot overnight as fresh gloomy economic data around the world continued to keep investors cautious about taking on any further risk. Data also revealed a sharp fall in producer prices, and activity in the New Zealand services sector fell to a record low in January. Falling inflation means the likelihood of further substantial rate cuts remains a real possibility.