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Dollar Flat vs. Foreign Currencies

The U.S. dollar is little changed Thursday against the major foreign currencies despite robust purchasing manager index readings throughout Europe and Asia.


The U.S. dollar is little changed against the major foreign currencies despite robust purchasing manager index readings throughout Europe and Asia.

The lack of much of a market reaction could reflect one of two factors. The first and most benign factor could be the lack of participation given the long holiday weekend for much of the world. The second and more serious consideration could be that the three-day recovery in the foreign currencies is getting tired. We would place more weight on the former, but also suspect many participants are wary that the disappointing

Automatic Data Processing

jobs data may not be a reliable guide to the nonfarm payroll report Friday.

Two other themes that have emerged this week remain intact. The first is the relative outperformance of sterling. Euro/sterling is at its lowest level since late February. The other thematic development is the continued appreciation of the Swiss franc; the euro/franc is at new record lows.

Global equity markets shrugged off the decline in the U.S. markets Wednesday. The MSCI Asia-Pacific Index rose 1%. The Nikkei rose 1.4%. It is up 14% since the mid-February low. It was helped today by the more than 10% rally in

Dai-Ichi Life

which raised roughly $11 billion in the largest initial public offering in two years.

China's Shanghai Composite rose almost 1.25% to reach a two-month high.

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Note too that the first rise in the Baltic Dry Index in more than two weeks helped shippers.

European bourses have also begun the second quarter with strong advances. Most markets are up around 1%. Basic materials and industrials are leading the way, while telecom is a laggard.

U.S. shares are trading higher and the early call is for an almost 0.5% gain at the opening.

While bond markets were firm in Asia, with 10-year sovereign yields slipping two to four basis points in New Zealand, Australia and Japan, European bonds are softer with yields rising one to two basis points. Greek, Italian and Portuguese bonds are firmer resulting in modest narrowing of spreads.

The U.S. Treasury will announce Thursday the size of next week's auctions. After the tepid response to last week's auctions, next week's sales will be watched closely. However, note that U.S. government bond issuance was about $392 billion in the first quarter, but Treasury expects second-quarter issuance to be dramatically lower at around $266 billion.

Japan's Tankan survey of 11,500 companies showed an easing of pessimism in line with expectations and it is the fourth quarterly improvement. The -14 reading for large manufacturers was in line with expectations. There are two more interesting components of the survey than the headlines. The first is the capex plans. Overall capex is expected to decline by 0.4%. This is a significant improvement from the negative 13.8% reading in December. This is important because capex and exports are the two interrelated legs of the Japanese economy.

Second, large manufacturers expect the dollar/yen to average around 91 in the fiscal year beginning Thursday. In the fiscal year just ending, the dollar averaged about JPY93.

The purchasing managers' reports, with few exceptions, are consistent with a broadening of the global recovery. After nearly stagnating in the fourth quarter, with a slow start to the first quarter, the eurozone economy appears to have re-accelerated late in the quarter and this likely bodes well for second-quarter gross domestic product.

The EMU PMI rose to 56.6 from 54.2, with strong gains in output and new orders and exports. The export reading was at a 10-year high.

The U.S. reports a slew of economic data Thursday. With the national jobs figure Friday, the weekly jobless claims won't draw much attention. The manufacturing ISM is seen as more important and it is expected to modestly improve from the 56.5 reading in February. February construction spending will likely remain weak. Watch for a strong pick-up in auto sales (12-million annualized unit pace), which should point to a healthy rise in retail sales.