Dollar Remains Firm

The US dollar remains firm as nervousness over the Korean peninsula and the ongoing turmoil in Europe. A number of shots fired between North and South Korea coincide with fresh reports of North Korean progress in its nuclear weapons program and some reports suggesting an earlier transition of power domestically weighed helped lifted the dollar during the Asian session, in which Japanese markets were closed and despite a modest reduction in South Korean foreign obligation. At the same time European debt woes continue.

While the 10-year premium Spain, Portugal and Ireland are paying over Germany is wider today by 13-16 bp, the short-end of the curve shows the pressures is even more intense. At the two-year sector, Spain's premium is up 10 bp and Portugal is 24 bp wider. Ireland is almost 70 bp wider and Greece nearly 90 bp. Spain sold its 3 and 6 month bills today, raising the lower end of the 3-4 bln euro target and at higher yields. The yield on 3-month bills rose to 1.7% from 0.91% last time and the 6-month bills went for 2.1% up from 1.3%. The EU and IMF agreed to payout the third tranche of loans to Greece but acknowledged additional measures would be needed to meet deficit targets.

As noted yesterday, the financial crisis has become a political crisis in Ireland and the government is poised to collapse. It is not clear that it will have a mandate to negotiate the budget and the bailout package. It is very unclear and the markets do not like the uncertainty. Portugal's budget looks to pass on Friday's final vote, but it masks a weak government.

The financial crisis and political anxiety is overwhelming positive economic news from the region. The key is the flash PMI readings from the euro zone. The manufacturing index rose to 55.5 from 54.6 in Oct and consensus expectations near 54.6. The service index rose to 55.2 from 53.3. The market expected a decline to 53.1.

The euro cannot sustain even mild upticks and the technical tone remains weak. The convincing break of $1.3580 now targets $1.3450-$1.3480. A move above $1.3630-50 is needed to stabilize the tone. Sterling has held up better than the euro, but the pressure appears mounting. Watch a 3-month trend line coming in today in the $1.5840-60 area and a convincing break could spur a 2 cent decline in the coming days. The dollar remains firm against the yen despite the heightened tensions. This is allowing dollar-yen to become decoupled from euro-yen and sterling-yen. Resistance for the dollar is seen near JPY85.00.

In US today, look for Q3 GDP to be revised slightly higher and FOMC minutes should make for sober reading as staff forecasts were signaled to have been cut. While events in the US are important, developments in Europe are urgent.
Dollar Remains Firm Dollar Remains Firm Reviewed by Marc Chandler on November 23, 2010 Rating: 5
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