As the pace of economic deterioration slows, continued policy stimulus will have implications for currency strategies over the coming months.

The US and world economy appears to be passing through, or may already have passed through, the worst stages of the current economic contraction, and though several leading economic indicators are turning positive, this is unlikely to signal an imminent return to economic expansion. Any such expansion may not occur until the third or fourth quarters of 2009, and it is hard to say just how sustainable or vigorous an economic recovery will be. Nevertheless, investors should look to move out along the risk spectrum in their currency allocations.

The US dollar is both a 'safe haven' and a counter-cyclical currency, and as such, diminishing risk aversion and a slowing of the global economic contraction should see the USD weaken.

With the risk rally continuing through the first week of April, markets continue to look to financials for indicators of a sustainable recovery in both economic sentiment and market conditions. In this focus, positive aspects may be drawn over the near term from the relaxation of 'mark-to-market' rules (which focus on the valuation of toxic debt assets on bank balance sheets) along with commentary from the recent G20 meeting. However the run in the risk rally may be capped through to the end of April, at which time the results on the stress testing of US banks will become available and the Geithner Financial Stability Program (which aims to restore the flow of credit to businesses and consumers) is implemented.

Citi analysts believe the pro-risk story has the potential to act as a short term downside on the USD before a period of unknown risk factors plays out as we move into May 2009. Once markets begin to settle, Quantitative Easing measures and improving risk appetite are likely to put pressure on the USD once again as we move through the cycle.