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March 6, 7:00 AM: EUR/$..1.0940 $/JPY..117.50 GBP/$..1.6032 $/CHF..1.3331

At 7:00:00 AM UK MPC Rate Decision (exp 3.75%, prev 3.75%) At 7:45:00 AM E-12 ECB Meeting (exp n/f, prev 2.75%) At 8:30:00 AM US Q4 Productivity (exp 0.0%, prev -0.2%) US Q4 Unit Labor Costs (exp 4.6%, prev 4.8%) Canada January Building Permits (exp 1.0%, prev -3.2%) E-12 ECB News Conference (exp n/a, prev n/a) US Weekly Jobless Claims (exp 403k, prev 417k) At 10:00:00 AM US January Factory Orders (exp 0.4%, prev 0.4%)

The dollar rose off of overnight lows on the back of profit taking and news that Britain has proposed a compromise on the second UN resolution proposed by the US and UK. The second resolution may not garner the needed votes now that China has now joined France's coalition with Germany and Russia in opposition. Politically, PM Blair needs a second resolution that could give more time but would still authorize military action against Iraq. In absence of that, the UK's participation in a US-led war against Iraq could add further pressure to sterling.

The other factor driving the dollar higher this morning was news that Germany' unemployment total rose by another 67k, which was twice as much as expected and carried the adjusted rate to 10.5% from 10.3% - a new 5 year high. Germany's labor office says the job market cannot recover while the economy stagnates and that the job market situation is "extremely serious" and hopes the unemployment has peaked.

European bourses higher today on the back of Wall Street's late session rally, but US equity futures pointing to a negative open, which should keep sentiment for the dollar depressed. However, most traders simply sitting on the sidelines ahead of this morning's ECB meeting at 7:45AM which is expected to cut rates by at least 25bp given the sharp deterioration in the economy over recent months. The market is discounting a 25bp cut, but some expect a 50 bp cut. Therefore, the biggest surprise would be no move, which would likely weigh on the euro.

The Bank of England's Monetary Policy Committee kept rates unchanged after a surprise 25-basis point cut to 3.75% last month. Other key meetings this week showed the Reserve Bank of Australia leaving its benchmark rate unchanged at 4.75%, while Canada raised rates 25bp to 3.0%, thereby adding to its yield advantage

EuroFX

EUR/USD fell to a session low of 1.0940 which straddles the edge of two key trendline supports. On Wednesday, the euro broke above the 1.10 mark to a new 4-year high overnight but preliminary resistance at 1.10 overpowered the buyers. Nevertheless major support lies at 1.0940, 1.0880 and 1.0840. As long as these hold, the upward trend should remain in tact. Above 1.10 targets 1.11/12.

Sterling broke above key resistance at 1.59 and rose to a 2-week high of 1.6050 in London trade following further profit taking in EUR/GBP from an overnight 4-year high of 69.15 to a day's low of 68.14. The potential ECB rate cut seen weighing on the EUR/GBP cross as it narrows the interest rate differential substantially. Cable now needs to remain above resistance at 1.6030, the 38.2% of 1.6560-1.570, to mark further gains. Follow up support eyed at 1.5990.

Swiss franc backed off of last night's 4-year highs against the dollar at 1.3258, as USD/CHF rose to a session high of 1.3340. But growing speculation that the US and UK could proceed with a military offensive as soon as the end of next week with or without the backing of the Security Council has pushed investors to the safe haven currency. In turn, the Swiss National Bank has said twice this week that it is continuing to watch its currency's FX rate with concern. However, further near term gains in the franc are likely given that USD/CHF first broke trendline support at 1.35 then failed to regain its previous 4-year low of 1.34 on a rebound. With little technical support between here and 1.32, the dollar is now trying to hold around the 1.33 figure but should test the 1.32 level soon.

USD/CAD

The Canadian dollar rose to a new 3 year high of 1.4682 in Asian trade after breaking 1.4730 -- the 50% retracement of the ascent from 1.3283 (November 1996) to 1.6188 (January 2002). The Lonnie added to this week's gains against the greenback following the BoC's raising of interest rates, which clearly added to the currency's desirability given that the economy is performing rather well.

AUD/USD

The Aussie has retreated somewhat from its multi-year highs against the dollar at 0.6180, and fell to a session low of 61.25. Further gains will encounter resistance at 0.6180 and 0.62. A break above will encounter subsequent ceilings at 0.6220 and 0.6250. On the downside, support is eyed at 0.6125, and 0.61 followed by 0.6080 -- the 38.2% retracement of the pair's decline from 0.8214 (Dec 6, 1996) to 0.4773 (April 6, 2001) and 0.6050.

USD/JPY

USD/JPY continues to hover in a tight range of 117.00/45 after it again failed to maintain above the 117.80 level this week. The dollar plunged to an overnight low of 117.07 yet traders remain wary of bidding the pair below this area which marks a clear line in the sand for Japanese monetary officials who have intervened in the past two months to weaken the yen. Dollar weakness and Japanese repatriation ahead of book closing at the end of the month could push the pair towards the 116/115 level which should keep downward pressure on the pair. A fall below 117 should find initial support at 116.30, followed by 115.75.

Japanese MoF's Watanabe said this morning that he has no comment on supposed FX intervention this week. He also said Japan sees no change in the US FX stance after Snow's remarks on the dollar. Moreover, he doesn't see the dollar falling continuously against the euro and yen. Watanabe's comments had no effect on the market which continues to trade in a tight range.

Iraq Watch

Saudi Arabia said it cannot pump any more oil than is being supplied now but it would allow the US to use its airspace to patrol Iraq.

China joined France, Russia, Germany in calling for more inspections in Iraq as the diplomatic stalemate between the anti-war bloc and the pro-war US-UK alliance remains unresolved ahead of Chief weapons inspectors Hans Blix's next progress report due on Friday. Despite steadfast opposition from Security Council members, the White House asserted that President Bush was confident that the Security Council would pass the second resolution sponsored by the US, UK and Spain.

However, in the latest twist, Britain has proposed a compromise on the second UN resolution proposed by the US and UK, reportedly wanting to extend the weapons inspectors time frame but make a clear date for full compliance.

By Jes Black at Forex News