NEW YORK (BBH FX Strategy) -- The U.S. dollar is mixed as the broad dollar rally loses steam into the North American open, highlights of which will include the U.S. weekly jobs numbers, the producer price index and the Philadelphia Fed survey.The euro is currently flat after rallying from overnight lows of 1.300 following the encouraging auction results from Spain. An eventual downside break of 1.30 sets up an eventual test of 1.26, the January low.
As note before, higher U.S. rates have been a big part of the story behind recent dollar strength, as interest-rate differentials continue to move in the dollar's favor. As dollar/yen rose today to a new high for this move above 84, the two-year U.S.-Japan spread rose to an intraday high around 30 basis points, the highest since July 2011, before falling back to 27 basis points. Similarly, the two-year U.S.-German spread is now around 16 basis points, the highest since June 2010. While the 60-day correlation with EUR/USD has been weakening steadily since mid-January, the 30-day has been rising back to positive territory in recent days, and is one of the factors we see as dollar-supportive. U.S. data Thursday for March could give the dollar rally another boost. Fitch late yesterday followed Moody's in placing the UK outlook to negative on its AAA, implying a one-in-two chance that it will downgrade within a two-year time frame. Chancellor Osborne will deliver the 2012-13 budget next Wednesday and he has also already made clear that there will no unfunded spending increases. Osborne will likely stress supply-side reform and other initiates as the best means to boost demand next week. Our own model puts the UK at AA, and so we think a downgrade is long overdue. Sterling is likely to remain under pressure against both the dollar and euro. EUR/GBP has likely bottomed near-term and likely to move higher as sterling outperformance ebbs. This pair is now pushing up against near-term resistance at the 50-day moving average (0.835). Support is near recent lows around 0.830.