Euro Stabilizes, But Remains Vulnerable Ahead of Raft of US Data

from the BBH Currency Strategy Team

The dollar is mixed today vs. the majors and is softer vs. EM.  The euro has stabilized, but continues to feel heavy as EUR/CHF holds marginally above the record low around 1.2440 from Wednesday.  With euro zone tensions remaining strong, further euro losses appear likely.  EM currencies continue to firm, suggesting continued decoupling from the euro zone crisis.  We believe that will be a major theme in 2011, with the EM outlook remaining very good.

Euro rallied after China Foreign Ministry said that it regards Europe as one of the most important markets in which to invest its foreign reserves.  This continues supportive China comments from earlier this week, but the marginal benefit seems to be getting smaller.
Trading ranges remain fairly narrow as we head into the holiday weekend.

BOE’s Fisher said UK interest rates will rise “to a normalized position” of about 5%, the Daily Telegraph reported.  Fisher added, however, that the BOE won’t “be putting up rates so quickly” and will only tighten policy quickly if the economy is strong enough to warrant it.  Sterling is mixed on the day.

Peripheral bond yields are mostly higher.  Portugal 10-year bond is the worst performer, with yield up 5 bp on the day.  Next is Greece, up 3 bp on the day.  With German 10-year yields down 2 bp today, the peripheral spreads continue to widen.

With German yields falling and US rising, the spread to the US continues to move in the dollar’s favor. Today, that spread has fallen to 27 bp, the lowest since mid-September and this should continue to boost the dollar.

Asian equity markets were mostly lower, while European equity markets have started the day mixed.  US index futures are currently pointing to a modest down open.

US data out today for November are durable goods orders (-0.5% expected, 1.8% ex-transport), personal income and spending, new home sales (6.0% expected vs. -8.1% previously), and weekly jobless claims (420k expected vs. 420k previously).

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