EURUSD has dropped by more than 1.3% in the past 24 hours, down to a low of 1.5638. USDJPY and USDCHF rallied to a high of 104.37 (from 103.32), and 1.0385 (from 1.0143). Gold weakened to 883.59, from 906.78, following the rise in the dollar and a general rise in risk appetite. At 0.75 (down from 0.78), our FX Risk Index attempts to move closer to neutral from very risk-averse as equity volatility has fallen and high-yielders' spreads over US Treasurys have tightened. Historically, on these occasions JPY and CHF traded on the defensive. The S&P 500 and the Dow are both up by 1% at the time of writing. In the news, ECB President Trichet said he was concerned the euro's gains will hurt Europe's economy. He also signaled interest rates are high enough to curb inflation by saying that current levels in interest rates "will contribute to achieving our objective, which is price stability", adding this was the "position of the Governing Council". Earlier on the day, Germany's March Ifo survey undershot already soft consensus expectations. On the US data front, durable goods orders fell 0.3% in March after a 0.9% decline in February. New home sales fell 8.5% mom and initial jobless claims reached 342k. The data continues to suggest a mild recession.

A number of trends have turned supportive for the dollar. Today's softer European sentiment numbers are the first sign that Europe will also be hit by the global slowdown over the medium term. At the same time, expectations of US monetary policy reaching the bottom of its cycle will cap the yield differential between the US and Europe. If the Fed next week signals a need to pause in order to assess the impact of previous monetary easing, the dollar will rebound. We continue to target EURUSD at 1.55 in a month.

Ahead today, final results of U. of Michigan Confidence are due. Next key data events will be S&P/Case Shiller Home Price Index and Consumer confidence on April 29. 1Q GDP is due on April 30 along with FOMC rate decision.

Germany's March Ifo survey released Thursday undershot already soft consensus expectations. After a surprising resilience in Q1, business climate index dropped to 102.4 from 104.8 in April and below the forecast of 104.3, expectations index was down at 96.8 from 98.4 and against expected 98, while current assessment index fell to 108.4 from 111.5 and weaker than expected 111. Along with weaker readings of French, Dutch and Belgian sentiment indicators reported yesterday and earlier this morning, Germany's puny numbers are the first sign of a downbeat trend ahead. We believe today's outturn is very important at current stage. The market sentiment has not completely turned yet in favour of the euro and more data suggesting a claw back in the Eurozone economy will help the re-assessment to take place sooner rather than later. This will take off the steam from the single currency, which we think continues to stay at overshot levels. ECB's Bonello, who is the governor of the Malta central bank, reiterated that anchoring inflation expectations in the ECB's priority, however noted it is difficult to argue higher rates. While the ECB may not be ready to cut rates as yet, a lackluster outlook should weigh on the euro.

UK March retail sales showed a worse than expected 0.4% drop on a monthly basis from an upwardly revised 1.1% increase in February. However, on an annual basis retail sales growth remains above the post-1997 average rising 4.6% y/y better than expected and against the upwardly revised 6.3% last. The outturn shows retail sales have been more resilient than some of the lead surveys, and will likely make it harder for the MPC to consider another consecutive cut. BoE minutes released yesterday showed the Committee split in its decision to lower rates by 25bp in April. A three-way split implies that diverging views will make future policy more uncertain. Our economists believe it will be crucial to see how financial crisis develops globally and in the UK as well as what impact the newly introduced BoE SLS will have. Our economists are looking for the central bank to keep rates on hold at its next meeting in May, but for it to continue lowering rates in June. Softer sentiment indicators in Europe helped EURGBP to come off, but we believe that upcoming activity surveys and housing market data will likely keep the pound under pressure. Our EURGBP forecasts remain unchanged at 0.78 and 0.76 over 1m and 3m, while we are looking for GBPUSD to come off to 1.93 over 3m.

AUDUSD hit a 0.9374 low after failing to sustain its gains above recent break-out levels at 0.9500. The move higher in the dollar and the retreat in gold currently adds to concerns that the AUD has seen its best days for now. Australian Q1 CPI was released on April 23 and at 4.2% y/y (previous 3.0%, consensus 4.0%), consumer prices accelerated to the highest level in more than 17 years, coming in considerably above market expectations. Although inflation reached levels far above the RBA's comfort zone of 2%-3%, our economists note that increasing signs of slowing demand and the neutral minutes from the central bank's last on-hold meeting suggest that a higher result would be required to stir the RBA into a tightening mode again. 0.91 is our 1/3 month forecast for AUDUSD.