Currencies Pull Back Into Weekend

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is broadly higher paring some of its losses seen Thursday as asset reflation bumps up against fleeting technical momentum and mixed economic data.

The euro is currently trading below 1.322 after steadily declining from 1.332.

The dollar is rallying against the yen, up 0.5%, after Bank of Japan Governor Masaaki Shirakawa repeated the bank's commitment to achieve its 1% inflation target. Yet, he also noted that liquidity alone cannot defeat deflation.

Sterling edged higher against the euro amid a combination of corrective euro action and underlying sterling support following a firm construction purchasing managers' index print. Asian stocks posted modest gains, leaving them close to seven-month highs with the MSCI Asia Pacific index up 0.3%. The EuroStoxx 600 is flat; banks shares are up 0.5%.

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Spain unemployment claims increased 112,269 in February, with total registered unemployed reaching 4.7 million and the pace of claims picking up. This comes after a pretty ugly fourth-quarter jobless rate of 22.9%, and points to further deterioration ahead.

What is more important to us is that European Union leaders have told "member states under scrutiny" that they should be ready to pursue other austerity measures if needed. In other words, despite recession risks in much of the eurozone, members are being told to tighten their belts again.

Spain is not unique, and given that it is going to have to revise its budget targets for this year in light of slower growth, so too will others. The debt crisis is by no means over given the negative growth/budget deficit dynamics in play, but the Long-Term Refinancing Operation appear to have bought the eurozone some time as Spain and Italy 10-year yields remain below 5%.