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By Andrew Wilkinson at IB:

Despite a midweek downgrade for Spain there were plenty of counter weights to prop up the slumping euro. Amongst them were rampant confidence among European business executives and consumers and a huge leap for German employment. Italy had no problems selling bonds out to the 10-year horizon this morning as a blanket of sense wrapped global investors. A repeat performance at the Fed after Wednesday’s meeting further underpinned the provision of ample liquidity at prevailing interest rates for some time to come.

Euro – The euro has rebounded from an excursion to $1.3115 yesterday and stands at $1.3265 this morning. The EC said that the Eurozone economic confidence index rose to a two-year high in April, remarkable given the turmoil. However, the news shouldn’t be a shock because for several months conditions have clearly been improving in manufacturing and service industries even though financial markets remain under pressure. Elsewhere the Federal Labor Agency reported a sharp decline in the number of unemployed workers in Germany. The 67,000 drop compared to a forecast fall of 10,000 and helped improve the rate of unemployment to 7.8% for April from 8% last month.

Confidence in the euro currency was further bolstered by comments from EC minister Olli Rehn after he updated reporters on the progress of ongoing EU discussions on Greece. While he said that more information would soon be available the results will show “a multi-annual program that will lead to major fiscal and structural adjustment.”

U.S. Dollar – The major snippet of news from Wednesday’s FOMC statement was the improvement noted by the panel surrounding the labor market. At the same time the Fed reiterated that it will maintain low interest rates for some time to come. In the latest available data the number of initial claims for unemployment benefit through last weekend fell by 11,000 and in-line with forecasts.

The fact that more positive earnings and fundamental data keep cropping up around the world coupled with the Fed’s firmly static monetary policy stance provided investors every reason under the sun to buy riskier and higher-yielding assets once again. As such, the dollar index is down and commodity-linked plays are back on the agenda.

Japanese yen – The recovery of risk appetite harmed the yen against all of the other majors. The dollar crept just above ¥94, while the euro recovered to buy ¥124.69 and the Aussie jumped to ¥87.30. The British pound today buys ¥143.66 ahead of Japan’s national Golden Week vacation.

Aussie dollar – The Australian dollar leapt in the U.S. trading session after reversing Greek-related losses from the first half of the week. Currently it buys 92.82 U.S. cents and was boosted by gains against neighboring New Zealand. Earlier comments from the RBNZ detracted from the kiwi after its Governor eased investor expectations about the pace of future tightening of monetary policy. He predicted that the need to raise rates would be less rushed than under previous cycles. Given the Aussie already benefits from its own growth-fuelled boost to rates, the Australian dollar took up the running especially as Asian stocks rebounded.

Canadian dollar – The Canadian dollar rebounded nicely too against the greenback. Firming commodity prices amid the day’s optimism included more than a dollar’s gain for crude oil prices sent the unit lunging back towards parity. Currently a local dollar buys 99.82 U.S. cents. Mr. Carney on day two of his testimony to lawmakers appeared to downplay the prospects of a June rate increase by saying that the recent drop in the central bank’s conditional commitment to ultra-low interest rates was in itself a monetary tightening. From here, however, let the data dictate where policy should go. It still looks to me that rates will need to move relatively rapidly as of the start of the third quarter.

British pound – The ascendancy of the Liberal Democrat party to first amongst equals in the opinion polls appears to have helped rather than hindered the pound. Today sterling has risen to $1.5271 against the dollar and 86.86 pence per euro. There is a growing feeling that it’s the LibDems, perhaps because they have nothing to lose by coming up with a plan, who have the best approach to tackling the fiscal mess. A minority government might be less of a problem if the Liberals hold the balance of power in parliament, helping rather than hindering fiscal retrenchment.