Dollar choked by inflationary evidence elsewhere

The dollar remains on its heels once again to start the week as an increasing number of reminders keep popping up on dealers’ radars reminding them of threats to improvements in its fortunes. Confidence among European investors jumped to a three-and-a-half year high. British manufacturers indicate rising input costs will lead them to raise prices while Australian employers sought new labor for a tenth straight month. Given what we understand about the way the Federal Reserve thinks, each event leaves the dollar marginalized as monetary tightening seems likely to pass it by while policy settings look increasingly likely to be altered elsewhere.

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U.S. Dollar – Equity index futures are swinging violently in pre-market trading as some investors attempt to bravely explain away the highest price of crude oil in 29 months as evidence that recovery is entrenched. Besides, they argue, it would take a protracted bout of elevated prices for oil to take a chunk out of the consumers’ pocketbook. But the volatility of that thought process has shifted stock futures from a six point gain to a six point loss overnight. Given our introductory list of evidence leaning on other central banks around the world coupled with the plausible prospect of an economic slowdown engineered by rising energy costs, the dollar index remains on the defensive and trades 0.3% weaker at 76.20. While it may prove to be too early to gauge the impact of the recent bout of rising gasoline prices on consumer psychology, the February spending report is one of the items on the economic calendar later in the week that will be closely watched. For now, there seems little reward to be had from being long the dollar on geopolitical grounds. After all how much worse could unstable Middle Eastern affairs become given the pro-democracy nature of protests?

Euro – The euro traded above $1.4000 for the second day. The market was clearly awaiting an outlier event on Friday in terms of a dollar-boosting non-farm payroll reading on Friday. In the event a reading of 192,000 additional jobs was neither too hot nor too cold and allowed euro bulls to continue safely preparing for an interest rate increase at the first opportunity. Today the single currency was further buoyed by a rise in the Eurozone investor confidence index from Sentix research institute. It measured enthusiasm from respondents at the highest since September 2007 although not without blemishes. The current index within the report was firmer but a forward looking index of expectations eased between months on account of rising energy prices and fears that instability in the Middle East might worsen. On Monday the euro reached its strongest against the dollar since November at $1.4036.

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