The festive period is well and truly upon us and with that comes staff increases for the holiday season, which was a contributing factor to the better than expected US payrolls reading the week before last. This gave the dollar room to fight back from recent slips and the greenback hit a five-week high against a basket of currencies on Monday morning.

The euro also picked itself up from lows touched the previous Friday and pre-budget nerves saw sterling fall overnight and come in looking a bit under the weather on Tuesday. The pound’s slip commenced in Asian trading and was instigated by a market order to sell sterling and buy euro. The Dubai crisis reared its ugly head again to contribute to the pound’s decline as stocks fell and worries mounted on Dubai World’s debt restructuring.

US Fed chairman Ben Bernanke poured cold water on the positive non-farm payroll report by pointing out that the job market was “weak” and more sustained evidence would be needed to assure a self-sustaining recovery.

Rolling along to Wednesday and all eyes were on Alistair Darling’s pre-budget report. The looming election and unhealthy state of the UK economy were on politicians’ and economists’ minds and Darling was forced to admit that the recession was deeper than he forecast back in April.

In came a one-time 50% tax on bank bonuses that exceed £25,000 which will expire on April 5th, which will no doubt result in a shed load of bonus payments being made on April 6th. The report also included an increase in National Insurance and a public sector freeze on pay limited to 1%, leaving the ability to halve the deficit within 4 years looking very doubtful.
 
The Fitch downgrade of Greece had everyone flustered and sent a clear message to those with thoughts of spending our way out of recession that debt cannot be escaped. The euro dropped sharply against the dollar as a result and concerns as to whether Eastern Europe could suffer the same fate will not help matters for the single currency.

The biggest gainer in the currency markets midweek was actually the Kiwi dollar as the RBNZ released a hawkish statement to raise the prospect of a rate increase earlier than expected.

Thursday saw the pound recover slightly as the dust settled following the pre-budget report as investors bought the pound back at cheaper levels. The euro was undercut by concerns about sovereign debt in the region after Greece’s credit rating was downgraded. The Aussie reached highs due to positive employment data and the Kiwi was also up after the Reserve Bank of New Zealand said it may begin removing policy stimulus by the middle of 2010.

Which brings us to a cold and frosty Friday morning in which sterling made gains against the euro and yen, but fell against a stronger dollar. A major ratings agency said Britain's top-notch sovereign rating was under no immediate threat, but this failed to alleviate concerns about UK fiscal health.

So this week should prove to be an interesting one as the Dubai plot thickens and speculation on whether we’ll have a white Christmas intensifies. Until next week, wrap up warm.

Nigel Hodges (Currency Solutions).