US Dollar falls on suspicion of further quantitative easing

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German Chancellor Merkel was in a particularly combative mood on Friday, stating quite clearly that Germany is in no mood to dish out any more bailouts by confirming that greater economic cooperation does not extend to collaboration on jointly-issued euro bonds. She stated categorically that they are "exactly the wrong answer" because "they lead us to a debt union and not a stability union".

Her comments posed the obvious question to investors; how will future economic cooperation work? At the moment, everything seems to hinge on the ECB soaking up government bonds from debt ridden countries and the application of a financial transaction tax. Not that any of this was any concern to the Euro on Friday.

The Euro was slightly lower against the Swiss Franc (but so was everything!) but edged higher against the US Dollar, Sterling and the Japanese Yen. What puzzled the market was how it managed to do so as there was no Euro-positive new released.

One reason for the Euro's gains could be the US Dollar's decline. There are some commentators who suspect the Federal Reserve is gearing up for another round of quantitative easing in another effort to boost the US economy. With Federal Reserve Chairman Bernanke due to speak on Friday, he has the opportunity to expand the QE program if he wants it.

The only data on Friday of any consequence was UK public sector net borrowing and Canada's consumer price index (CPI). Headline Canadian CPI inflation eased from 3.1% to 2.7% in July, just below forecast of 2.8%. As one of the main indicators the Bank of Canada looks at when it makes its interest rate decisions, the Canadian Dollar slumped in late UK trading.

Public sector net borrowing in Britain went up by an insignificant £20 million in July, considerably less than the half billion or so that investors were expecting. It was a good result but not good enough to lift Sterling.

Economic releases will provide a slew of new data this week including manufacturing activity, consumer confidence and Q2 GDP from the UK ahead of a highly-anticipated speech from Fed Chairman Bernanke on Friday.

Disappointment in key, market-moving indicators including the Eurozone PMIs, German IFO, Richmond Fed's PMI, or the University of Michigan consumer confidence index are likely to exacerbate fears about a global recession and perpetuate market volatility.