The U.S. dollar was mostly firmer vs. the majors on a Turnaround Tuesday, reversing the selling trend that was in place since last week as Greece concerns came back into the markets (see below). EUR/USD rally ran out of gas around 1.3540 and then fell back to test 1.34 and end with an outside down day. Yen was mostly softer, however, and so USD/yen rose to test the 93 area, its highest level since early January.

Biggest gainers on the day vs. USD were CLP, GBP, KRW, ZAR and COP, while biggest losers vs. USD were HUF, CZK, RON, EUR and NOK. EM currencies were mostly softer, though USD/BRL managed to remain below 1.80.

U.S. data had little impact, as CaseShiller home price index was close to expectations and consumer confidence was only slightly better than expected. RUB rebounded the day after the Moscow subway bombings, helped by higher oil and commodity prices.

U.S. equity markets were mixed, with the Dow Jones, S&P 500 and Nasdaq up 0.1%, flat%, and up 0.3%, respectively. European markets were lower, as DJ Euro Stoxx 50 ended down 0.3%.

Asian equities are likely to open up today as Asian ADRs were higher during N. American trading Tuesday. Nikkei futures point to a flat open for Japan, but the softer yen should help Japan exporters.

U.S. bond market was mixed, as 2- and 10-year yields rose 2 bps and were flat, respectively. European bonds were mixed too, as 10-year yields in U.K., France and Germany were up 2 bps, down 2 bps, and down 2 bps, respectively. Greek 10-year yields rose 16 bps after an unexpected 12-year bond sale went poorly, as only EUR 390 mln sold vs. EUR 1 bln planned limit. Greece announced plans to sell 3-, 6-, and 12-month bills in Apr. Meanwhile, 10-year Portugal yields were flat, Italy down 2 bps, and Spain down 1 bp.

Currency Markets

The Greek fiscal problems have morphed into a larger structural issue for Europe. Germany itself has come under criticism by some euro-zone members including France, over its export reliance, its sluggish domestic economy and its stingy wage policy.

Germany is responding to these criticisms. First, it notes that it has provided 90 billion euros of fiscal stimulus over the past two years. The European Commission has fixed budget deficit targets and has called on Germany to reduce its deficit. In fact, the EU has faulted Berlin for its lack of interest in additional austerity measures.

Second, it explains that wages in Germany are not set by the government but are a function of negotiations between industry associations and trade unions. Some German officials have argued that export sector wages -- especially in the auto sector and for mechanical engineers -- are relatively high by international standards.

Third, it argues that many of the goods it exports are simply not made elsewhere. Yet Germany commitment to fiscal austerity is readily apparent. It unilaterally, for example, adopted a deficit/GDP ratio of 0.35% in 2016 and earlier this month announced a 6 billion euro cut in this year's budget.

The IMF cut Germany's growth forecast for this and next to 1.2% and 1.7%, respectively. At the start of the year, the IMF forecast 1.5% and 1.9%. Part of this is simply recognition of Germany's near stagnation in fourth-quarter 2009.

The IMF identified downside risks to its forecast for a moderate-paced recovery, including sluggish banking system (with the Landesbanks needing restructuring) and the risks of weak international trade. The IMF said that Germany should boost domestic consumer spending, which would help insulate it from external shocks and the vagaries of currency movement. While this sounds like a bone to some of Germany's critics, the IMF -- which some wag suggested stands for Its Mostly Fiscal -- also said that Germany should not ignore its goal of fiscal consolidation and that any tax cut in 2011 should be paid for by spending cuts.

Around April 10, China will report March trade figures. A number of high-ranking PRC officials have hinted that a deficit may be reported. Of course, no one believes that if a trade deficit is reported that it represents a trend change. Instead, the data may be skewed by a number of factors that are unlikely to be sustained, but it may very well be a deficit nonetheless.

Within a week of those figures, the U.S. Treasury is expected to make its semiannual report about manipulation in the currency market. No country has been cited by the U.S. for several years, but there is a risk that the Obama Administration cites China this year. The Obama Administration appears to be edging toward a confrontation. Obama himself has warned as much. But as is often the case, the foreign policy is also about domestic politics.

By taking a tougher stance toward China, Obama will find support among both parties in Congress and may help garner support for the other free-trade agreements pending. Yet, if the U.S. does cite China as a manipulator in the foreign exchange market, China could very well cancel the Strategic Economic Dialogue talks scheduled for May and further strain the already precarious relationship.

Ironically, fixed exchange rates used to be the orthodoxy and even today, free floating exchange rates appear to be the rare exception. Fixed exchange rates cannot be tantamount to manipulation. One major perception problem is that many observers see China as a single entity.

Yet, although it is a one-party state, there are different interest groups represented in the upper echelons of the government. Several weeks ago, a couple of highly respected observers said a Chinese move seemed imminent. It would seem they talked with the same pro-appreciation camp -- probably the central bank itself.

On the other hand, the Commerce Dept seems to prefer a steady currency. Yuan appreciation is not the proper or effective tool to address trade imbalances. Chinese officials, recalling the U.S.-Japanese experience, see that in such a situation, no amount of currency appreciation would satisfy some of those voices in the U.S.

Fitch upgraded the outlook on Estonia's BBB+ foreign currency rating to positive from stable, citing increased chances of euro adoption by 2011. Fitch downgraded to BBB+ back in April 2009, making it the lowest of the three ratings (S&P is A-, Moody's A1). Fitch said that formal approval of its bid to adopt the euro would lead to an upgrade. While Estonia is the best-positioned of the Baltic nations, we disagree with Fitch's view that euro adoption automatically leads to an upgrade.

Certainly, many would argue that euro adoption really didn't make Greece more creditworthy and indeed, allowed it to continue unsustainable policies under the umbrella of the euro. We continue to believe that the rating agencies are too generous with much of Eastern Europe.

With that said, however, S&P cut Iceland's local currency to BBB from BBB+, but maintained the foreign currency rating of BBB- with a negative outlook. Agency cited "prolonged" capital controls as restricting Iceland's policy flexibility and investment prospects.

Back in January, Iceland was downgraded to BB+ by S&P, and even that rating remains too generous, in our view. Economy Minister Magnusson complained that the rating is lower than deserved and that Iceland's debt number compares favorably to many other nations. Really? We disagree.

We know of no other country with an external debt/GDP ratio close to 1,000% or a short-term debt/reserves ratio close to 1,500%. We cannot believe Moody's ever had Iceland at Aaa.

Upcoming Releases

Asia: Australia retail sales; Korea IP; Thai trade, current account, IP; India current account. Europe/EMEA: Hungary current account; Turkey trade, GDP; euro zone, Germany unemployment; South Africa, Iceland trade; Poland trade, current account, central bank meeting; Poland IP, retail sales Americas: U.S. ADP jobs, Chicago PMI, factory orders; Canada GDP; Brazil budget; Fed's Lockhart, Duke speak.
Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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