US Dollar Up, Others Struggle

The U.S. dollar enjoyed what currency analysts are calling “Turnaround Tuesday” due to impressive midweek performance that is likely linked to improving U.S. real estate market data and …

The U.S. dollar enjoyed what currency analysts are calling “Turnaround Tuesday” due to impressive midweek performance that is likely linked to improving U.S. real estate market data and positive news from the Federal Reserve, and has even shown strength against the yen. The euro is down after not meeting hoped-for resistance goals and sterling also continues to struggle, while both European and Asian markets both saw declines. Meanwhile, the Australian dollar is showing signs of weakness and currencies in emerging markets slip, rounding out a wide field of underperformers. For more on this continue reading the following article from TheStreet.

The dollar is broadly higher today, and reflects a "Turnaround Tuesday" from the previous two days of dollar weakness. U.S. housing data may prove supportive of the USD, but markets will be more focused on any hints of additional asset purchases from Fed Chairman Ben Bernanke’s speech Tuesday.

The euro is down after failing to hold the 1.325 level, which continues to remain a key level of resistance. Support is seen near 1.315. Sterling showed a limited reaction to the UK consumer price index, which came in above expectations (0.6% month over month vs. 0.4% and 3.4% year over year vs. 3.3%), though the year-over-year rate continued its deceleration path since September’s recent peak of 5.2% year over year. The dollar is stronger against the yen but is likely to meet resistance at 84.00.

Global shares are mostly lower, with Asia stocks drifting lower led by weakness in Chinese equity markets. Rumors of heightened China political tensions made the rounds, but we discount this.

Japanese markets are closed for a public holiday. European shares declined for a second day, with the EuroStoxx 600 down 1%. European bank shares are down roughly 1.5%. Oil prices are down today, helped by press reports that Saudi Arabia is sending tankers to the US full of oil in order to help bring down prices.

Italy’s Prime Minister Mario Monti has won well-deserved praise since replacing Silvio Berlusconi, but his most challenging test begins in earnest today as he meets with union leaders to work out a deal on labor reforms.

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From a high level, the problem is this: Because the legal framework (crystallized in "Article 18" from the 1970s), older workers have proprietary rights in their jobs. Younger people either don’t work or are relegated to more tenuous short-term contracts, for which banks are reluctant to lend. Although Italy’s unemployment rate is below the eurozone average, its employment rate is about 57%, among the lowest in the area.

In addition, due to the unfavorable demographics, Italian unions represent retirees more than workers. The thrust of Monti’s reform is to make it relatively easier, though still far short of the employment-at-will seen in the U.S., to hire and fire and to link more benefits with shorter term contracts.

Labor reform has been in Italy what Social Security reform has been in the U.S. — so controversial and antagonistic of various and conflicting vested interests that politicians typically avoid it. Already the metal workers’ union is protesting even the discussion of a two-hour intermittent slowdown Tuesday.

Labor reforms are so integral to Italy’s structural reforms that the failure here would jeopardize Monti’s legacy and could very well signal the end of Italy’s "financial" outperformance. Any renewed concerns about Italy or Spain would surely lead to further euro weakness.

In that regard, Spain continues to simmer. After reporting that bad loans jumped to 7.9% of total loans in January from 7.6% in December, the 12- and 18-month bill auctions got a so-so reception as it sold 5.04 billion euros vs. the 5.5 billion euros targeted amount. Spain bank lending contracted 0.7% month over month and 3.1% year over year in January, so the economic backdrop worsens.

The AUD is amongst the weakest currencies on the day. Release of the Reserve Bank of Australia minutes from the March 6 meeting showed it sees plenty of room to ease should conditions take a turn for the worse, while noting that it feels the current policy stance is appropriate.

Indonesia exceeded its targeted sales of sovereign debt in an auction today, placing IDR7.3 trillion vs. the indicative target of IDR6 trillion. Total bids amounted to IDR14.1 trillion. According to the latest available data from the central bank, as of March 16, foreign ownership of local government debt has remained stable around IDR225 trillion since February, while as a percent of total debt, it has remained stable at around 30% since late last year.

Meanwhile, BRL is likely to take it on the chin Tuesday after sharp losses were seen near the end of trading Monday. Beside broad emerging market weakness Tuesday, comments from Monday are likely to carry over. Treasury Secretary Arno Augustin talked of using many foreign exchange measures in which surprise is "part of the game."

While the comments were not new, they reveal the ongoing obsession with the exchange rate, and the prospect of even more measures may finally be wearing on the market’s appetite for Brazil. While 1.80 has proven to be a good anchor in recent days, we believe USD/BRL is likely to test the 1.85 in the coming days.

This article was republished with permission from TheStreet.


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