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Euro weakness was maintained in European trading on Friday with a trough around the 1.2765 level, the lowest Euro level since the second week of December, as markets looked to challenge underlying Euro support levels. The dollar also continued to gain some support from defensive demand as risk appetite remained subdued with stock markets generally struggling for much of the day as fears over the financial sector and global economy continued.
The flash Euro-zone PMI data was slightly stronger than expected with the manufacturing index edging higher to 34.5 for January from 33.9 previously while the services-sector index rose to 42.5 from 42.1. There was also a small improvement in the Belgian business confidence index which suggests that deterioration in the Euro-zone is slowing. Confidence will still be very fragile in the short term with markets also uneasy over banking-sector stresses and the Euro struggled to gain support.
There was a strong rally in gold prices on Friday with the metal pushing towards the US$900 per ounce level. Unusually, for much of the day, gold strengthened in tandem with the dollar. The rise in gold will, however act as a significant warning that dollar confidence could erode rapidly and the US currency faltered in New York. There will be particular fears over the huge deficit financing required this year. The ECRI leading index also remained at depressed levels according to the latest survey
Any increase in tensions over the exchange rate policy would also increase the underlying dollar risk profile and the Euro pushed back to near the 1.30 level later in US trading as Wall Street looked to rally. The Euro retreated to below 1.29 again on Monday before rallying again as markets struggled to secure a decisive trend with the US and Europe both facing major stresses.
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