Dollar Pressured as Stocks Push Higher

NEW YORK ( BBH FX Strategy) -- The dollar continues to remain under pressure as global stocks push higher ahead of Barroso's potential announcement today on plans for the recapitalization of the eurozone's banks.

The news comes amid a very choppy overnight session which saw the EuroStoxx 600 swing between gains and losses, with a total intraday trough to peak swing of nearly 2%. Nonetheless, the benchmark index is set to advance for its fifth day out of six. Materials lead the move higher after an unexpected rise in eurozone industrial production. S&P futures are up nearly 1% as well.

Against this backdrop, safe havens have fallen back with bund and gilts posting losses, with gilts outperforming bunds, supported by an unexpected rise in the UK unemployment rate. One blot against today's backdrop, though, is that U.S.-China trade tensions are likely to intensify after the U.S. Senate passed the China currency bill.

Slovakia, the potential slayer of the European Monetary Union, continues to grab the headlines for the second day after it failed to pass the enhancements of the European Financial Stability Facility Tuesday. While the no-vote did not come entirely as a surprise, given the euro has appreciated by 1.2% in the past two days, it has become apparent that with Slovakia contributing the most to the EFSF as a relative size of GDP (nearly 10% of GDP) that Slovakian interests took precedent over the greater good of the eurozone.

In any event, we continue to expect the government to pass the bill as early as today (according to recent press reports) but we also expect the government to resign a condition for passage of the EFSF 2.0 later this week.

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The euro's sharp gains over the past few days, in our view, continue to be driven in part by extreme market positioning, which turned sharply against the euro over the past few weeks. In fact, over the past eight weeks the market has sold nearly $13 billion worth of euro speculative contracts on the CFTC, nearly double the size of the second-most sold currency, sterling.

That means, with all the euro bears moving to the one side of the boat, the euro has been sensitive to "positive" policy and economic data news. For today, the combination of better than expected EZ industrial production, a Slovak yes-vote and hopes of policy response from European officials is likely good enough to keep the euro afloat, along with a boost from the upside cross of the 5 and 20 dma (which is also seen on the S&P, GBP and AUD).

Elsewhere, UK economic news continues to sour, with unemployment rising by nearly 100,000 over the last quarter coupled with ex-bonus average incomes trending at less than half the prevailing rate of inflation. Altogether, the ONS stats office reports that the UK now has the highest total number of unemployed since October 1994.

The People's Bank of China was reported to have intervened in the Chinese equity ( Shanghai Index, in particular) after the U.S. Senate passed legislation on the China currency bill. We think the bill is untimely and more importantly we suspect the probability of it becoming law is quite low at this juncture. Nevertheless, in the near-term the Senate's passage is sufficient to dampen the outlook for bilateral cooperation between the U.S. and China at a time when economic cooperation from two of the world's largest countries is needed most to maintain global growth and stability.

It is impossible to rule out the potential for its passage entirely, which in our view likely would lead to a U.S.-China trade war (assuming China would be expected to retaliate, for instance, by taxing U.S. goods to China). In turn a U.S.-China trade war would likely dampen global activity and may prompt a double dip.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.