Prospects therefore remain disappointing, and are being made worse by the differences that exist between member countries. The European Central Bank therefore faces a difficult situation. It continues to forecast "moderate" growth and "moderate" inflation; but it is being severely criticised for failing to address the problems of a two-speed economy, and for its unwillingness so far to face the threat that the deteriorating situation in Greece could quickly begin to destabilise other member countries and have serious consequences for the financial stability and growth prospects of the entire area.

It is not surprising therefore that investors and speculators have started to reduce their exposure to the euro.

Shaw Capital Management News - Foreign Exchange Markets 2010 Part 4: - The critical question therefore is whether the fall of the euro is now over. Since the currency is unlikely to receive any real support from the general background situation in the euro-zone, everything depends on the developing debt situation, and particularly on the situation in Greece; and also on the possibility of support operations from stronger member countries and from the European Central Bank, and the European Commission. The situation remains uncertain. The central bank appears to be reluctant to offer help, and the German government, which might have been expected to become involved, has also made no response so far.

Shaw Capital Management News - But the European Commission has endorsed the latest plans by the Greek government to introduce an across-the-board freeze on public sector wages and cuts in allowances that are expected to reduce the overall public sector wage bill by around 4%.

This may encourage support from elsewhere; however the Commission has warned that it will not tolerate any slippage from the target and will if necessary demand tougher action from the government to ensure that it stays on course.

But it is far from clear that the Greek government can obtain the necessary support in parliament even for the present proposed measures, and so the uncertainty will continue.

It is therefore likely that there will be further falls in the euro over the coming weeks.

Sterling has improved slightly over the past month, helped by the weakness of the euro.

Shaw Capital Management News - The background situation in the UK remains unattractive, and there have already been threats that its AAA credit rating is at risk unless there are credible measures to reduce the massive fiscal deficit after the forthcoming general election is over.

Shaw Capital Management News - Foreign Exchange Markets 2010 Part 4: - The European Central Bank therefore faces a difficult situation. It continues to forecast "moderate" growth and "moderate" inflation; but it is being severely criticised for failing to address the problems of a two-speed economy, and for its unwillingness so far to face the threat that the deteriorating situation in Greece could quickly begin to destabilize other member countries and have serious consequences for the financial stability and growth prospects of the entire area.

But the UK is not constrained by membership of the European single currency system, and so there is no immediate risk of a default on its sovereign debts.

It has therefore been able to benefit from the problems affecting some other European countries.

Shaw Capital Management News - Foreign Exchange Markets 2010 Part 4: - The latest figures from the Office of National Statistics indicate that the UK just managed to move out of recession in the final quarter of last year. The estimate of growth of only 0.1% in the quarter was a considerable disappointment, and it is expected that it will be revised higher; but clearly the economy is not performing very well.

Government spending remains strong, and there was a surge in retail sales in the run-up to Christmas; but the anecdotal evidence suggests that consumers became much more cautious again in January.

The latest meeting of the Monetary Policy Committee of the Bank of England was concerned by the poor reaction so far to the dramatic measures that have been introduced to counter the recession, and reacted to this situation by leaving UK base rates unchanged once again at 0.5%.

Shaw Capital Management News - Foreign Exchange Markets 2010 Part 4: - It clearly has no intention of moving to an "exit strategy" until there is convincing evidence that a sustainable recovery in the economy is underway.

It did announce that purchases of market securities under the quantitative easing programme would now be discontinued after the £200 billion target has been reached; but its main priority is to continue to provide support for the fragile economic recovery.

Fiscal policy is also likely to remain unchanged until after the election, because the necessary measures to reduce the huge deficit will be unpopular, and might influence the outcome of that election.

Sterling is therefore receiving no real support from the domestic background situation, and in other circumstances might have been expected to move lower.

Shaw Capital Management News - Foreign Exchange Markets 2010 Part 4: - But the problems affecting the other major global currencies, and particularly the problems affecting the euro, have at least delayed any further falls. The yen has improved over the past month, despite a generally unfavourable domestic background situation, and some attempts by the Japanese authorities to prevent its appreciation against other currencies.

It has achieved an enhanced "safe haven" status in the current storm in the currency markets, and on the back of the relative success of its exports. But conditions in the Japanese economy remain very weak, and there has even been the threat of a downgrade of its credit rating unless measures are introduced to reduce its massive fiscal deficit.

However it does not appear that this threat will prevent the new Japanese government from introducing further measures to stimulate the economy, and urging the Bank of Japan to intervene in the markets to weaken the yen, and so its prospects remain very uncertain.