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The Egyptian army seems to side with the protesters. They don’t seem to have any will to break the demonstrations, and they are held aloft the masses. The demonstration in Tahrir square in Cairo came out about alongside US-made tanks. The army just made sure no weapons were brought into the square.

Also in Alexandria, which has seen more bloodshed, the army accompanied a march that followed funerals of the casualties.

The military did fight against Bedouins in the Sinai desert, also sending ┬áreinforcements. The additional tanks in Sinai violate the peace accord with Israel, and were likely quietly approved by Egypt’s eastern neighbor.

In the meantime, Egyptian president Hosni Mubarak gave instructions to the new prime minister, trying to show that he still has everything under control. PM Shafik is expected to take control of the economy, and especially escalating food prices.

It seems that it’s a matter of days until Mubarak will step down, and it’s still very unclear who will replace him. If the Muslim Brotherhood takes over, it will endanger peace with Israel and will continue moving oil prices higher. It will also trigger risk aversive trading, boosting the dollar, yen and Swiss franc. On Friday, the Egyptian criss already sent EUR/USD down.

If we get a smooth transition to democracy, the dollar will drop on optimism. Mohamed ElBaradei doesn’t seem to be popular enough to be able to take over and win confidence. Time will tell.

In the meantime, the week began with a stronger dollar. See the EUR/USD forecast for the events expected this week.

Update: Israel approved the entrance of 800 Egyptian soldiers into Sinai, a violation of the peace treaty. They are expected to battle the rioting Bedouins and prevent arms from reaching Hammas.

But Hammas, which controls Gaza, fired Grad rockets at Israel. More details inside.