In the currency market, the dollar sharply extended its rally against the euro. Late Tuesday, the euro was trading at $1.3061 vs. $1.334 on Monday. Ho hum. “Another day, another strong U.S. dollar performance. The demand for [the] U.S. dollar remains strong with liquidity still at a premium,” wrote Matthew Strauss, of RBC Capital Markets. Across the pond, things are tough all over, as the British pound sank 2.7% against the buck yesterday. The U.K. economy has likely entered a recession and faces a “long march” back to stability, said Mervyn King, governor of the Bank of England. “The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,” King said. Those betting against the euro, because they believe the US economy will recover more quickly than Europe’s, are hearing some challenges to that view. “The market seems to ignore that another economic stimulus package is associated with high costs and a rising budget deficit,” wrote strategists at Commerzbank. “The market only focuses on possible economic impacts.” Also, “One can argue that Europe still has a long series of interest-rate cuts to go while the Fed is already closer to the bottom of the rate cycle,” said strategists at KBC Bank in Brussels. “The need for more financial support for the European banking sector is also often mentioned as negative factor for the single currency. To be honest, we’re not convinced by that argument.”

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