NEW YORK ( BBH FX Strategy) -- The dollar maintained its stronger tone after Wednesday's streak of better-than-expected data and upward revisions to Friday's jobs data, with the exception of the Canadian dollar, the New Zealand dollar and the yen. At the same time, the euro fell to the lowest level in a week as signs of improvement in the U.S. economy build momentum, but option-related buying should keep the euro near $1.3125. The pound consolidated recent gains after a weak service PMI print forced the pound-dollar pair from 1.5564 to session lows. Meanwhile, the euro/Swiss franc was little changed around 1.2700, but the Swiss franc weakened vs. the dollar after a benign Swiss CPI release. Despite the slowdown in inflation numbers, the Swiss franc should remain well bid vs. the euro as Europe's sovereign debt issues keep the euro under pressure. Elsewhere, the Australian dollar continued to struggle amid concerns over the growth outlook following the Queensland flood, while a drop in November building approvals exacerbated losses. Global equity markets were higher after broad gains on Wall Street. In Asia, with the regional benchmark index advancing for the eighth day in nine, the MSCI Asia index rose 0.6%. Japan's shares are up again (hitting an eight-month high) following yesterday's ADP report, which weakened the yen and contributed to a 1.4% gain. Chinese shares, however, were lower. At the same time, European bourses advanced with the benchmark Euro Stoxx 600 up 0.8%, reaching a fresh two-year high. Likewise, U.K. and German stocks advanced, with the DAX up 1.1% led by gains in materials after German manufacturing orders jumped 5.2%. U.S. equity futures pointed to a positive open, up 0.3%. Global bond markets are mostly weaker as the economic data have been mostly positive and equities surge. Eurozone spreads widened again, despite a reported commitment from China to buy 6 billion euros of Spanish debt. Ten-year Portuguese yields are up 10 basis points followed by a 6-basis-point increase in 10-year Italian, Spanish and Belgium debt. In addition, France sold 4.48 billion euros of 2020 bonds with a coupon of 2.5% at an average yield of 3.36%. Meanwhile, German 10-year bonds erased a decline to leave the yield little changed at 2.940%, while the U.S. Treasuries are up, with the yield on the 2-year down 2 basis points and the 10-year down 3 basis points. Elsewhere, Moody's raised the Philippine's rating outlook to positive from stable while Brazil will impose a tax on bank's short positions on dollars in a bid to curb speculative trade. In addition, it will raise reserve requirements on bank's foreign exchange positions to 60% of foreign exchange sold positions and banks have 90 days to adhere to the rule.
The price action this week underscores our view that participants have unwound year-end developments. The euro has returned back to the 200-day moving average, which it had been toying with until late December. Perhaps even more illustrative of this point, is that the weakest G10 currency in the last two weeks of December was the pound, which has been best performer against the dollar this week. Similarly, the strongest currencies from mid-December were the antipodeans, yen and Swiss franc, which have been the poorer performers this week. As an aside, the fact that both the high-yielding Australian and New Zealand dollars have been moving in the same direction as the low-yielding yen and Swiss franc for the past three weeks suggests traditional carry-trade strategies are the not the main driver. With the currencies unwinding the year-end moves, the risk appears to be increasing that there is a "buy the rumor sell the fact" type of trading after what is now nearly universally expected to be a strong U.S. jobs report Friday. Part of the dollar's recovery in recent days appears to have been encouraged, if not fueled, by the string of strong data. How many times can the market discount strong U.S. economic data? Even the more doom and gloom observers recognize the U.S. economy has accelerated. Weekly initial jobless claims have been trending lower, even if the sub-400,000 print in late December was skewed by the holidays and poor weather. Many participants appear to be waiting for the jobs data to get back involved. A strong jobs report may see them want to buy dollars in response, but that could very well run into the profit-taking by those who have already sold the foreign currencies and bought the dollar. At the same time, to be clear, the dollar pullback envisioned here, in our view, would represent a new buying opportunity. The European Financial Stability Mechanism (EFSM) raised 5 billion euros Wednesday in the first funds not as a bailout of Ireland, but to bail out out Ireland's creditors, as the Emerald Isle does not lower its debt burden one iota. To the contrary, it will be paying about 5.5% for the money that the EFSM raised at 2.59%. The pricing of the bond was tight at 12 basis points above the mid-swap rate and was in high demand. Reports indicate that Europeans themselves bought three-quarters of the offering -- indeed, a triple-A issue. Central banks and other official accounts competed with the private sector and managed to take down 38.5%. Similarly, the EFSM and EFSF will raise at least 49 billion over this year and next and will compete on the margin for investors who may have bought other European sovereign bonds instead. It may seem ironic with the world awash in debt, but there is a shortage of risk-free assets. These bonds will certainly add to that supply. The most important data today has been the dramatic decline in the U.K. service PMI. It unexpectedly fell below the 50 boom/bust level (49.7) for the first time since April 2009. At the same time, it follows the disappointing construction sector report Wednesday. Although sterling is trading inside Wednesday's range, the report arrested the attempt to take the pound higher in response to the press report suggesting that the BOE's Sentance, who has been advocating a rate hike, could soon be joined by a couple of his colleagues (Fisher and Bean). Using market-based indications, it appears that the market is pricing in a strong chance of a 25-basis-point rate hike by late this year.