The euro is sitting at a 5 week low against the US dollar this morning as the single currency continues to be plagued by uncertainty surrounding ECB strategy. Larger than expected credit write downs at Bank of America yesterday reignited fears that the worst is not over in the financial crisis putting an end to the recent 6 week rally in global equities.

Pound Sterling - UK Markets

Sterling has declined against the US dollar, finding support just above the 1.45 level, as a wave of risk aversion swept markets overnight. This morning the pound is largely unchanged against the euro, trading in the vicinity of 1.12 and is down over 1% on the New Zealand dollar.

Inflation figures out this morning show consumer prices falling in the UK. The core consumer price index for March is running at 2.9%, taking the annual rate of inflation to 1.7%. The retail price index is running at 0% for March, taking the annual rate to -0.4% largely due to falling house prices and lower interest rates. The lower cost of energy is also fuelling the downward trend and this is helping to bring inflation inline with the government target of 2%. This morning Tesco has reported a GBP3 billion profit, a 10% rise since the last financial year. We can expect some volatility for the pound during the rest of the week with Bank of England minutes, the annual budget, ILO unemployment rate and continuing jobless claims out tomorrow.

US Dollar - US Markets

The US dollar strengthened overnight, trading in the vicinity of 0.77 versus the euro and 0.68 versus the pound as credit losses at Bank of America prompted fresh fears over the stability of the financial sector. This morning the higher yielding currencies have trimmed losses against the dollar with the pound, Aussie and Kiwi dollars all staging minor rallies.

Bank of America’s corporate earnings released yesterday show that despite a USD4.2 billion first quarter profit, the bank will be forced to set aside over USD13 billion to cover toxic loans. This ends up close to a break even performance and the news rattled markets, renewing fears that the worst of the recession may not be over. Bank of America shares lost 24% while Citigroup shares declined more than 16%. The news also affected global equities with the S&P closing down 4.3% and the Dow Jones losing 3.6%. The losses also put an end to the 6 week rally in global markets and economists predict markets are entering a phase of short term consolidation with credit losses expected to get worse before they get better. In the US today Treasury Secretary Geithner is to make a speech and the Washington Post Consumer Confidence survey is due.

Euro – European Markets

The Euro continues to fall against the dollar, reaching a five week low of 1.28 during Monday’s US session and remains bearish this morning. Against the pound the euro staged a slight recovery yesterday and the euro has also declined against the Australian and New Zealand dollars.

Statistics released in Germany this morning show the producer price index fell -0.7% in March, taking the annual rate to -0.5%. The public debate between ECB members over the best course of action for the Eurozone continues to pressure the single currency in the absence of any positive financial data. Uncertainty over the pending ‘unconventional measures’ from the ECB is making investors nervous although a reduction in the base rate by 0.25% seems likely. Results of the German ZEW economic sentiment survey are due out this morning.

Other Currencies - Highlights

Asian equities fell across the board yesterday, triggered by renewed fears over the state of the financial sector in the US. The yen ended three days of gains against the euro and dollar although recent signs of improvement in the Chinese economy have acted as a buffer to drastic selling. Also this morning the Indian Central Bank has reduced the repo rate, at which the bank makes short term loans into the economy, by quarter of a percentage point to 4.75%. This is the sixth time since October the rate has been reduced and the Indian Central Bank expects growth to slow to 6% this year. The Canadian Central Bank is to make an interest rate decision today.