Dollar Gives Up Gains As Risk Appetite Returns

[B]Talking Points

• Japanese Yen: seesaws between dollar weakness and risk appetite
• Euro: Back above 1.5500 on Central Bank demand
• Pound: consolidates gains at 1.9900
• Canadian Dollar: awaits Retail Sales
• US Dollar: Consumer confidence on tap[/B]

After a quiet holiday week-end traders returned to the currency market emboldened to take on more risk by plowing into the high yielders as equity markets across the globe recorded triple digit gains in the wake of JPM’s announcement that it will quintuple its bid for Bear Stearns from $2 top $10 per share. In early Asia EURUSD exploded to 1.5550 on the back of reputed buying from Asian central banks which led to rapid short covering from many momentum players who were caught wrong footed after establishing fresh dollar longs just yesterday.

With no economic data on the European calendar for second day in a row and trading still relatively illiquid the moves overnight were highly volatile with some pairs such as USDCAD jumping 40 points in a matter of several minutes. Liquidity should return back to normal conditions by the open of the North American session as all the major money centers will finally be at full staff after the Easter holidays.

In US today, traders will get a glance a Consumer Confidence numbers and the Case Shiller housing index. The news on the housing front is expected to show steep declines in price, but the key report is likely to be the Consumer Confidence survey. Many analysts are now concerned that the recent spate of bad US economic news will create a negative impact on consumer behavior. With consumption comprising more that 70% of US GDP, a severe retrenchment in consumer spending could grind US economic activity to a halt. Latest data from the U of M survey suggests that attitudes may have stabilized in March but its far from certain that the CC numbers will confirm that trend.

The consensus call for today is a slight decline to 73.5 from 75.0 the month prior. However, should the data slip below the 70.0 level, the news could trigger a fresh wave of dollar selling taking EURUSD back to the 1.5600 level. ECB officials have expressed some concern with the recent strength of the euro with ECB Vice President Lucas Papademos noting in an interview with Russian newspaper today that moves have been “excessive”.

Nevertheless, his language fell far short of “brutal” which has been the code word used by ECB President Jean Claude Trichet in the past to communicate ECB displeasure with the movements in the pair. One gets the sense that as long as EURUSD remains below the 1.60 level, ECB officials will simply keep a wary eye on exchange rates but will continue to tolerate the single currency’s appreciation. In short the EURUSD continues to consolidate with sharp reversals likely to be the norm rather than exception for the being as traders lurch from one piece of news to another looking for a fresh theme.

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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]