Euro Finds Support Ahead of Bernanke Comments

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is consolidating after Wednesday's sharp rally in North American trading. Price action may be driven again by Fed Chairman Ben Bernanke after many observers perceived his comments Wednesday to be a bit on the hawkish side. We think it is unlikely that Bernanke would indicate a policy shift at this type of forum so we suspect Bernanke may try to recalibrate his communication this morning as a result.

Follow TheStreet on Twitter and become a fan on Facebook.

The tone of the market is broad dollar weakness with emerging markets and dollar bloc currencies leading the advance. The euro is up marginally to 1.333, with near-term support at 1.323 and resistance ahead of 1.35. The dollar is slightly lower against the yen, down 0.1%.

Meanwhile, the markets will also be awaiting the ruling from International Swaps and Derivatives Association on whether the subordination of the private sector to the official sector is tantamount to a credit event.

Elsewhere, news reports indicate that Brazil has extended a 6% tax to foreign borrowing, which is likely a catalyst for BRL's underperformance relative to other emerging market currencies.

Global stocks are mixed with European shares higher after Asia shares closed down mostly lower. The EuroStoxx 600 is up 0.6% led by the 1.2% rise in bank shares. Italy's two-year yield is currently trading (1.856%) just north of the low seen in late October of 2010 (1.763%).

A revision to China's holdings of Treasuries is among one of the key developments today. While the new data revised sharply higher June 2011 Chinese holdings to $1.307 trillion from $1.165 trillion the data points to a sharp decline in the second half of last year. Holdings peaked at $1.315 trillion in July and finished the year near $1.152 trillion.

There are several reasons why observers and investors should not be very concerned about the report, including that the $163 billion decline in China's Treasury holdings $103.4 billion took place in December alone. This is preliminary and subject to revisions. But perhaps what is most overlooked, the shift is unlikely to disturb U.S. officials one iota. Across administrations, the U.S. has argued that China should stop intervening and allow its currency to appreciate and to shift away from the export-driven model. The net consequence of this would be for China to buy fewer Treasuries.