The U.S. Dollar rose against most major currencies on Monday following a sharp sell-off in the U.S. equity markets which began after Mike Mayo of Calyon Securities said the U.S. banking sector problems still have further to run before they reach bottom. He also said that U.S. government action may not offer as much help as expected. His report triggered a profit-taking break in banking sector stocks which spread to the broad-based equity markets.

Adding additional pressure to the stock markets was George Soros who was referring to the U.S. when he stated in an interview that the "banking system as a whole is basically insolvent." He also added that the U.S. economy is in for "a lasting showdown."

Over the weekend U.S. Treasury Secretary Geithner alluded to the U.S. government getting more involved with the operations of U.S. entities that receive taxpayer/government aid. This made equity traders nervous before the opening on Monday since it bordered on nationalization.

These three comments eroded the optimism that had been building in the global equity markets over the past four weeks because they represented doubt. Putting doubt in the minds of traders in this fragile environment leads to fear and fear triggers selling. The pessimism that was in the U.S. equity markets on Monday helped the U.S. Dollar benefit as traders once again looked upon the Dollar as a safe haven currency.

At the close on Monday one could sense the fading optimism about the global economy. This usually happens at the end of rallies that are built on emotion and not sound economic factors. Once the global community begins to embrace the idea that the global economy is in bad shape and expected to weaken further then can it begin to take steps to fix the problems. By stripping away the optimism and eroding investor appetite for risk, traders will be forced to focus on economic factors. At this time there is nothing from an economic standpoint just emotion to support the recent break in the Dollar which leads me to believe a new rally may be in the works.

Fear that the U.S. banking system is still under pressure drove traders out of the Euro on Monday and into the safety of the U.S. Dollar. Much of the optimism that has been driving the Euro higher over the past few weeks was eroded as traders are now beginning to feel that perhaps the U.S. economy has not bottomed and holding higher yielding assets may be too expensive because of their risk.

One development on Monday that was primarily overlooked by traders was that the Fed and four other central banks plan to create a currency swap arrangement. This new plan will give the U.S. Fed access to as much as $285 billion in Euros, Yen, British Pounds and Swiss Francs. While considered preemptive at this time, the plan "would enable the provision of foreign currency liquidity" by the Fed to U.S. financial institutions.

This action by the Fed and the other major central banks raises the question: is there something cooking in the foreign currency markets that we should be worried about? Is there a currency on the brink of collapse?

The facts remain the same, the Euro Zone economy is still weak, and there will be no signs of improvement until export demand picks up, production increases and unemployment stops rising. Just because the European Central Bank is hesitant to cut rates because it doesn't want to erode the value of the currency like other developed nations have, is no reason to believe the long Euro is the place to be.

I can see buying the Euro to take advantage of the interest rate differential, but this reasoning is not suitable for everyone. A sustainable long term rally is not likely in the Euro until the economy gets better either. Until then, each rally is likely to be short-covering. If the U.S. can't get its banking system in order then investors will be least likely to seek higher yields elsewhere and will continue to look to seek the safety of the U.S. Dollar.

The British Pound finished lower on Monday as the Dollar strengthened on a flight-to-safety rally. Talk is circulating that the Bank of England may be poised to try another round of quantitative easing in anticipation of the recession moving deeper than previously estimated. Investors may be beginning to sense a fear that the U.K. economy is going to get weaker before it gets stronger. One major Forex analyst even alluded to the possibility of a collapse in the British Pound.

Although the GBP USD has been strong for weeks, fading optimism can turn to pessimism pretty fast and pessimism can trigger selling pressure. Traders should continue to monitor the U.K. economy over the short-run to see if there are any improvements. If the situation keeps getting worse then the BoE may be forced to take aggressive action in the form of quantitative easing. Depending on the degree off the easing, the British Pound faces exposure to the downside.

For the first time since September 2008, the Bank of Japan is expected to refrain from any major announcement at this month's policy meeting. Although the official statement may include language stating that the economy is showing improvement in some areas, realistically traders have to be thinking that the Japanese economy really can't be improved at this time until its major trading partners start to show economic improvement. When you have an economy that relies on exports, your economy will suffer when your customers can't afford to buy your goods.

Don't expect any action from the BoJ, but watch for the announcement of a major stimulus plan from the Japanese government by Friday.

The drop in oil prices sent the Canadian Dollar lower on Monday. It looks like crude oil traders are finally realizing that real demand is necessary to drive this market higher - optimism about the economy is not enough. Lower equity prices also sent out a bearish signal to Canadian Dollar traders. All it took was a break in commodities and equities to erode the optimism that has been building in this market.

Weakness in the Canadian economy could trigger a further break tomorrow as traders are beginning to price in a 50 basis point cut by the Bank of Canada. It was also reported on Monday that the value of building permits in February fell by a greater than the expected 15.9 percent. This is making traders realize that an interest rate cut may not be enough to stimulate the economy. The BoC is already on record stating that it will announce its plan for quantitative easing on April 23. Look for an acceleration to the downside in the Canadian Dollar if it loses its support from lower equities and commodities and the economy continues to show signs of weakness.

The flight-to-safety rally helped weaken the Swiss Franc on Monday. Traders seeking a higher yield abandoned plans after pessimism about the U.S. banking system triggered a sharp break in U.S. equities. Expectations of lower earnings by U.S. corporations could weaken equities even further tomorrow. This could lead to more upside pressure in the USD CHF.

Traders are mixed about tomorrow's Reserve Bank of Australia interest rate policy meeting tomorrow. Some are looking for a 50 basis point cut while others seek no change in the benchmark rate.

The RBA believes that lower rates and government spending will keep the economy out of a recession, but may be hesitant to cut rates at current historically low interest rates. The economy is giving mixed signals at this time. The 2008 4Q GDP report showed a contraction but this represents the past. The recent retail report also showed a decline. Contrasting this weakness was an improving home building approvals number and a widening of the trade surplus.

The recent rally in the AUD USD may give RBA policymakers a reason to cut rates. Some believe that a high priced Aussie Dollar will curtail demand for Australian exports. All it will take will be a few policymakers to believe that a high priced currency will stop an economic expansion before it gets a chance to start.

The NZD USD put in a mixed performance on Monday following a report that businesses were more pessimistic about the economic outlook. Now that the U.S. equity markets face some uncertainty and the stronger U.S. Dollar should drive down commodity prices, look for New Zealand Dollar traders to focus on the economy a little greater.

There is nothing bullish in the economy to support the recent rapid price increase which means a sell-off could be coming. Corporate earnings are slumping and exports and foreign investment are down. All of these are signs the current recession is likely to worsen before it will get better.

Barring another leg up in global equity markets, look for selling pressure on the NZD USD to begin. The market should at least correct 50% of the recent rally.