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Dollar Soft, but Rangebound

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is paring back some of its recent gains but continues to trade in tight ranges.

The euro has recovered but stalled out just ahead of 1.33, a key level of resistance. A break of this level would likely open up a move toward 1.350, but we expect economic weakness in the euro zone and concerns about Spain to remain headwinds for the euro. For now, we remain in a 1.30-to-1.33 range.

The Australian dollar is flat near 1.04, after declining for three consecutive days. The yen is also flat on the day, after rallying nearly 1% over the past five days.

Sterling looks set to close the week flat after data and BoE minutes left the door open for another round of QE in May. Global shares are down, with the MSCI Asia Pacific Index down 0.6%. European stocks declined for a fifth day, with the EuroStoxx 600 down 0.3%. Bank stocks are down 0.6%. Commodity prices are firmer and recouping some of the losses Thursday.

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Despite Thursday's dollar rally, most currencies remain in this month's trading ranges. The euro in fact has recovered to the upper end of that range, though the 1.33 area representing the 62% retracement of the February-to-March drop in EUR is offering some resistance.

News from the eurozone is limited Friday, but certainly better than Thursday as Italian retail sales for January came in stronger than expected, rising 0.7% month over month. Prime Minister Mario Monti holds a cabinet meeting Friday, most likely to discuss progress in passing labor reforms.

French business confidence also came in better than expected and rose for the second straight month. So overall, calm has returned, but Spain 10-year yields remain elevated and near 5.5%, suggesting ongoing concerns have not entirely gone away. We need to see a break of 1.33 for the euro upside to open up, perhaps as high as 1.35. U.S.-German two-year yield is 12 basis points Friday, up from 10 bp Thursday.

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