Euro higher as risk rebound points to rising yields

Euro higher as risk rebound points to rising yields

The post-earthquake sigh of relief has allowed investors to reposition for a rebound in riskier assets helping put the focus once again on a round of rising interest rates. The dollar seems least likely to benefit in that role call and as such has weakened to its lowest in 15 months against a basket of currencies. Meanwhile the prospect of imminent tightening across the Eurozone and screaming genies of the British variety seemingly let loose from the inflation bottle make the continental pair the choice du jour among investors.

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U.S. Dollar – You have to look back on the charts to December 2009 to find the dollar index as weak as it is today. The ailing greenback has fallen to its weakest point in 15 months as investors rapidly conclude that a relatively nuclear-free disaster in Japan means that the global recovery will ultimately feel a boost from the need to rebuild a nation. Yesterday’s announcement from the U.S. Treasury that it is heading towards the exit in relation to its mortgage backed securities portfolio has not budged expectations regarding any shift in the fed funds rate at this point. Weakness in the dollar is largely confined for a second day to rampant commodity currencies and acceleration in the value of the British pound.

British pound – Inflationistas can be seen wagging their fingers at the Bank of England and saying, “we told you so!” after today’s rise in consumer prices to the headiest pace in 15 months. The February CPI index rose a greater than expected 0.7% bringing the year-over-year cost-of-living increase to 4.4% and rising beyond the Bank’s 2% ceiling also for 15 months. The pressure is rising on the remaining MPC members to capitulate and vote in favor of an inflation-fighting tightening in monetary policy. By most other measures the economy is likely to face severe growth challenges in the year ahead leaving Governor King faced with a very difficult balancing act in public. It seems that there is only so long he can keep blaming the erosion of living standards on tax measures and commodity prices. On his side, however, is the elixir of a rising pound, which today broke to its strongest against the dollar in 14 months to $1.6401 and going forward helps unwind some of the rising input costs paid by producers as commodity prices rise. Crucial to the whole debate is the peak for consumer price inflation. Governor King warned earlier of this hump. What’s unsettling money markets today is the fact that the pace grew by more than expected. On Wednesday we’ll learn more about the thinking of the MPC at its last meeting earlier in March when the minutes are released.

Euro – The euro rose against the dollar for the fourth day and now sits at around its highest since Nov. 5. As noted earlier the emphasis is clearly shifting back among investors to thoughts of imminent monetary tightening. Two governing council members yesterday expressed the need for the ECB to play out its vigilance through tighter monetary policy so that inflation doesn’t manifest itself. In response to questions at the Brussels EU parliament yesterday Governor Trichet said he had nothing to add to those remarks he made at the last ECB press conference at which he let the cat out of the bag on raising monetary policy. The coordinated G7 intervention aimed at stemming the rising yen from deepening disruptions facing Japan is also understood by the ECB. However, its recognition is unlikely to deter them from making the tougher choice of knocking monetary policy out of neutral. The euro today buys ¥115.28 and $1.4228.

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