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Dollar Begins Week Softer

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is marginally softer as North American players return to their posts.

The better-than-expected official Chinese manufacturing purchasing managers' index (53.1 from 51.0 in February and consensus for 50.5) saw steeper losses in the greenback. The disappointing eurozone manufacturing PMI however (47.7 same as the flash but weak details) helped cap the euro in front of last week's highs, ahead of 1.34, and weighed on European equities.

The UK Chartered Institute of Purchasing and Supply survey of manufacturing surprised on the upside (52.1 vs 50.7 consensus) and sterling extended recent gains, though we suspect it will struggle to extend those gains in North America Monday.

Japan's Tankan Survey disappointed, showing no improvement from the December report (large manufacturers diffusion index -4), with softer capex plans (1.0% vs 1.4% in December) and expectations of a firmer yen (JPY78.14 vs JPY79.02 in the December survey).

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There are several policy implications from the recent data reports. First, the rise in China's official PMI supports the idea of a soft landing in the world's second-largest economy. This would seem to reduce the urgency of easier monetary policy.

Second, it also has knock-on effects for the outlook of Tuesday's Reserve Bank of Australia meeting. Speculation seen last week for a cut has been largely, even if not wholly, reversed. Of the central banks that meet this week (RBA, Bank of England and European Central Bank), Australia still is the most likely to surprise, although we now expect it to wait a bit longer to move.

The Bank of England will leave its rate and asset purchase program unchanged. The ECB is in a more difficult position. March was the eighth consecutive month of a sub-50 PMI reading. Moreover, the forward-looking new orders component gives no hope for optimism of stability. It stands at 45.4 from 45.6 in the flash report and down from 47.3 in February.

The eurozone also reported another increase in the unemployment rate -- 10.8% in February from 10.6% at the end of last year and 10.0% in February 2011. Yet interest rates are not the main obstacle to growth. Instead, austerity and deleveraging are the main culprits. Ironically, in the current environment, weaker growth will force some countries to increase their austerity efforts or overshoot their fiscal targets.
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