By DailyFX - US Dollar. The market has been fairly quiet today with the US dollar continuing to slowly give back some of the...

... strong gains that it incurred last week.


There are a lot of reasons why the dollar is under pressure today, all
of which have ramifications that should extend far longer than just
having a one day impact on the value of the US dollar. The most
worrisome developments is official news out of Iran that they have
successfully "joined the club of nuclear countries" by enriching
uranium for the first time. This is in direct defiance of the UN
Security Council's calls last month for the country to suspend nuclear
research within 30 days and that is sure to lay pressure on the West to
respond to Iran's latest push to test their comfort levels. Rumors
have already surfaced yesterday that the US may use nuclear weapons on
Iran. The government has denied these reports, but geopolitical
uncertainty is never good for a country's currency. In the meantime,
both oil and gold prices are skyrocketing in response to the growing
geopolitical risks. In fact, oil prices are but a whisker away from its
all time November 2005 highs of $69.45. If you recall, when we were
trading above $69 a barrel, gasoline prices in most states were above $3
a gallon. This time should be no different and we expect higher energy
prices to not only be sore point for the dollar right now, but also be a
big damper on consumer spending and growth in the second half of the
year. Tomorrow we are expecting the trade balance for the month
February, which is the first major release of the week. The forecasts
are calling for a mild contraction, but we know that the trade picture
isn't getting any better. China reported today a trade surplus that
doubled expectations. Soaring exports and slower growth in imports
pushed the country's surplus to the second highest monthly reading
ever. The US is China's largest trading partner with China closing in
on Canada as the US' largest trading partner. Therefore it is
perfectly feasible that we could see the trade deficit widen instead of
narrow. If so, expect some dollar bulls to begin to head for the exit
and more to join them if retail sales also disappoints on Thursday. Of
course on the flip side, good numbers would validate the recent calls by
some major investment banks for 5.5 percent or 6 percent rates and help
the dollar recover some of the past two days of losses.

Euro
Despite weaker German economic data, the Euro managed to rebound for
the second consecutive day. The ZEW survey of analyst sentiment fell
from 63.4 to 62.7, against the market's forecast for a rise to 65.5.
As we mentioned yesterday, the ZEW survey was probably taken before the
European Central Bank's latest comments. According to the ZEW
institute, analysts were worried about the impact of high oil prices and
the risk for a general slowdown of the world economy. For the most
part, they think that Germany's growth may have peaked given the lack
of stimulus to fuel a further recovery. We think that this bearish
sentiment certainly has to do with the fact that the Euro was
skyrocketing at the time of the survey and the ECB looked as if they
were going to increase rates in both May and June, both of which would
have reduced the stimulus in the economy. Meanwhile we finally have
some results from the Italian elections. Romano Prodi has been declared
the official winner of the parliamentary elections after an extremely
close vote. The current Prime Minister Berlusconi has refused to
concede defeat, citing big discrepancies with the tallying of the votes.
This feels like déjà vu all over again with the close votes that were
later refuted both here in the US a few years ago and then later in
Germany between Merkel and Schroeder. We all know that in both
scenarios, the officially declared winner, still became the eventual
winner. We would be surprised if the Italian elections were any
different.

British Pound
The British pound strengthened against both the Euro and US dollar
despite weaker trade figures. Even though the trade deficit narrowed to
*GBP6.4 billion in the month of February, there was a huge downward
revision to the January data from GBP5.7 billion to GBP6.4 billion. The
number also came in much weaker than the market expected. The market
however is mostly holding out for tomorrow's UK employment figures.
Economic data out of the UK has been very mixed, but employment is
always important to watch in hopes of clearing the air on where the UK
economy stands. The market expects the number of jobless claims to
increase, but less than the previous month's rise and for the
unemployment rate to remain unchanged. On the brighter side, earnings
are expected to tick higher which should be mildly positive for consumer
spending.

Japanese Yen
The Japanese Yen sold off against all of the major currencies except
for the US dollar. To the dismay of anyone who may have been hoping for
some volatility, the Bank of Japan ended its two day monetary policy
decision and delivered nothing new. At the much anticipated press
conference held by Fukui, the BoJ Governor repeated that rates can
remain low as long as inflation does not move significantly out of line.
He also gave no timing for the end of the country's zero interest
rate policy. The central bank's monthly report remained bullish as
they noted that household incomes were increasing and that the level of
economic activity is rising. Yet overall, there is still nothing new
from the central bank and the market will continue to anticipate their
inevitable move. Meanwhile, the yen is suffering from the country's
heavy reliance on oil imports. With crude prices edging towards its all
time highs, Japan's current pace of recovery could be threatened.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com


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