US Dollar. Today marks the third day of weakness in the US dollar. In fact, the greenback lost ground against all of the majors including… … the commodity
currencies, which benefited from a new record high in gold prices.

The New Zealand dollar actually experienced the greatest recovery after
selling off significantly over the past three months. The extension of
dollar weakness comes on the heels of a strong non-manufacturing ISM
report. Expected to initially dip to 59.0 from 60.1, the
non-manufacturing ISM actually rose to 60.5. Interestingly enough, the
prices paid component dipped, giving the market a reason to doubt the
strength of the report. We mentioned yesterday that the service sector
has been holding up far better than the manufacturing sector. This
suggested that a stronger service sector ISM report would not have been
particularly surprising. The weaker prices paid component comes in
contrast to the stronger inflation readings reflected in the
manufacturing sector ISM report released earlier this week. At a time
when the market already doubts the Federal Reserve's optimism and
hawkishness, this is not good news. Yet losses could be limited here on
forward as the market preps itself for non-farm payrolls on Friday. US
Treasury Secretary Snow was on the wires today talking up the report.
He said that the upcoming March employment report should show “some
good numbers.” The market is currently forecasting 190,000 jobs to
have been created last month. This would follow the 243,000 jobs that
were created in February. At this point, the dollar really needs a
strong jobs report because the remaining dollar bulls may be simply
holding out for this release. If job growth fails to deliver, then we
could see the barriers to a fresh year to date high in the EUR/USD being
lifted.

Euro

We saw another strong day in the EUR/USD today as the currency pair
continues to close in on its 6 month high. The European central bank is
scheduled to make a monetary policy announcement tomorrow. An interest
rate hike is not expected, but the rumor is that the ECB could signal
the possibility of another rate hike in May. Today's economic reports
however suggest otherwise. Retail sales fell 0.2 percent in February
despite growing 1.0 percent year over year. Sales in January were also
downwardly revised from 0.8 percent to 0.5 percent. In addition, even
though the Eurozone service sector PMI survey remained unchanged at
58.2, the performance of the individual countries were quite surprising.
As the traditional leader in growth, Germany's service sector index
actually fell in March from 57.8 to 56.6. Italy and France on the other
hand saw acceleration in growth for their own service sectors. For
once, we may actually see France and Italy catch up to the expansion
that we have been seeing in Germany. The diverging performance and
unchanged regional index should have little impact on the ECB's rate
decision. Euribor futures are showing at least four more rate hikes
before year end. This suggests that once the Federal Reserve is
finished tightening, the ECB's continued rate hikes could draw quite a
bit of attention.

British Pound

True reflection of how the UK economy is performing in comparison to
other countries is reflected far betting in the EUR/GBP cross than the
GBP/USD currency pair these days. Despite weaker economic data, broad
dollar weakness ended up pushing the British pound higher. Against the
Euro however, the British pound hit a one year low. The UK reported a
slew of disappointing economic data this morning. The service sector
PMI index dropped from 58.9 to 57.4, which was worse than expected.
Industrial and manufacturing production, which were both predicted to
increase actually dipped in the month of February with corresponding
downward revisions to the January data as well. Both monthly and
annualized growth for both reports came in weaker than expected. It
seems that the housing market is the primary sector of the economy that
is delivering healthier reports. Most other sectors are still showing
signs of weakness. The BRC shop price index also reported lower prices
in the month of March. This is certainly not enviable going into the
Bank of England monetary policy meeting tomorrow. The BoE will be
leaving interest rates unchanged once again as economic data continues
to come in mixed.

Japanese Yen

The Japanese Yen strengthened against the US dollar for the third
consecutive day but most of the overnight gains were given back in the
early European trading session. For the time being, USD/JPY remains
trapped in a tight range, but the longer that we stay in this range, the
higher the likelihood for a substantial breakout. The direction is not
crystal clear with higher US rates contending with more hawkish Japanese
monetary policy. On top of that, foreign interest in Japanese
investments is being offset by fresh investment outflow by the Japanese.
The bigger story for the Yen have been in the crosses. EUR/JPY is
trading at the highest level since the inception of the Euro. In fact,
both AUD/JPY and CHF/JPY have shown strong gains over the past few days.

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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