The euro zone crisis is expected to remain high on the agenda after Germany found its support for using tighter fiscal policies as a remedy for Europe’s debt troubles waning amongst world leaders who appear to be encouraging a more dynamic response such as introducing Eurobonds.

Sterling’s ability to act as a hedge against Europe’s economic and political woes seems to be slipping as traders look forward to inflation data and Bank of England minutes that will add to the country’s quantitative easing debate.

Sterling

The pound endured another session of profit taking as investors pared bearish bets against the euro before the meeting between world leaders while the prospect of euro zone debt troubles inflicting more stress on the UK economy continued to worry analysts. Traders lightened up on defensive bets on expectations that G8 officials would reiterate a co-ordinated commitment towards ending Europe’s fiscal nightmare. Those hopes supported a rebound in Cable, but not before the pound had breached a two-month low versus its safer US counterpart.

US dollar

The dollar registered a record sequence of daily advances against a basket of currencies to reach January 13 highs. The greenback is also trading close to four-month peaks versus the euro and two-month highs against the pound. Any evidence of hope offered by European leaders over the coming days could lead to a rapid unwinding of “long” safe haven US dollar positions.

Euro

The euro still under a cloud of uncertainty that seems to have darkened even more after a meeting between G8 officials further cemented the divide between Europe’s elite on how to best tackle the euro zone’s latest crisis. It appears that Germany’s hard-line stance on supporting debt-stricken nations is coming under pressure ahead of what is quickly turning into another “make-or-break” meeting between euro zone officials.

Japanese yen

Fresh threats of intervention by Japanese officials recently seem to have fallen on deaf ears after traders continued to pile into low-cost defensive currencies taking the yen to four-month highs against the euro and, more crucially, three-month highs versus the US dollar. Japan tends to watch the yen’s value against the US dollar to gauge whether or not the Japanese currency is appreciating too fast which has a damaging impact on local export business. With euro zone debt risks showing no signs of abating, the yen appears to be heading into perceived intervention territory.

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