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Dollar Under Pressure at Month End

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is finishing the week, month and quarter on the defensive. The euro appears poised to challenge the $1.34 area that capped it earlier in the week, while sterling is trading above $1.60 for the first time since last November.

Demand is driven from short-term players as well as asset managers. Sterling has been particularly resilient over the past week or so amid merger and acquisition reports. The greenback is also sporting a softer profile against the yen, with a marginal new low for the week recorded in early Europe after a dip below JPY82.00.

The U.S. dollar's weakness is broad based, with the dollar-bloc currencies, Scandis and emerging market currencies all gaining today. Equity markets are mostly higher. The MSCI Asia Pacific managed to close marginally higher, though the Nikkei traded heavily after the unexpected decline in February industrial output (-1.2% month over month vs. consensus of +1.3%).

The Shanghai Composite, however, gained about 0.5%, for the first gain since the start of the week. India's equities were the strongest with a nearly 2% increase. Gains were widespread and sufficient to reverse the week's earlier losses.

European bourses are also fully recovering from Thursday's slide, following the recovery in U.S. markets Thursday. There is talk of Q2 portfolio allocations. European peripheral spreads are mostly tighter.

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The focus now ahead of the weekend is three-fold: First, Spain is set to unveil its 2012 budget. Full details will not be available until it is presented to parliament next Tuesday. However, the overall savings is what investors are most interested in. The market is looking for more than 20 billion euros in new savings on top of the 15 billion euros of savings announced at the end of last year. To get ahead of the curve of market expectations savings in excess of 30 billion euros may be needed.


Recall that Spain overshot last year's 6% target, delivering an 8.5% shortfall. This year's new target is 5.3% vs the initial 4.4% EU agreement and the 5.3% compromise. The January-to-February deficit came in at 20.7 billion euros, which represents a modest increase from the year ago period. Spain's 10-year benchmark yield rose 40 basis points in Q1 and alongside the 5.7 billion euro current account deficit, the government reported that 5 billion euros of portfolio capital left Spain in January.

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