Dollar Remains Firm on Stronger U.S. Outlook

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is broadly higher, continuing Tuesday's rally that intensified after the FOMC meeting. In the eurozone, there were no new developments but the euro made a marginal new low of 1.3031, while sterling is currently flat. The dollar climbed to an 11-month high of 83.51 against the yen, with resistance expected to come in near 84. The Antipodeans are among the weakest performers in the G10.

Global stocks pushed higher following the strong U.S. close. The MSCI Asia Pacific Index is nearly 0.5% higher, while European shares are gaining the second day in a row. The EuroStoxx 600 is currently up 0.7% led by 2.1% gain in banking shares. Fed's annual bank stress tests late Tuesday were well received by the markets so far, with U.S. stock futures pointing to an up open currently.

The eurozone remains quiet, for a change. However, negative dynamics remain in play. The Greek press is reporting that the European Union has asked Greece to detail fiscal measures worth EUR11.7 billion for 2013 and 2014 by June. This comes despite GDP that's expected to contract in 2013 and stagnate in 2014. The EU has already asked Spain to cut an additional 0.5 percentage points of GDP from the 2012 budget, in response to Prime Minister Mariano Rajoy's recent move. As recession deepens, this issue will remain a sore spot in both countries and in others.

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U.S. economic outlook continues to improve. February retail sales were stronger than expected. Equities rallied sharply as a result and, more importantly, the U.S. Treasury market sold off.

The near-term target for EUR/USD remains 1.2974 February low, but a break of 1.2954 sets up a test of the January low around 1.2624. With Friday's pattern still holding true, strong U.S. data continues to translate into a stronger dollar.

This change in dynamics can be seen in the breakdown in the correlation between the euro and the S&P 500. The 60-day rolling correlation on percentage changes has fallen to .4579, nearly half the peak of 0.8550 back in December. The 30-day correlation has fallen even more, to .4058 from .9092 in December.