Dollar Pushes Higher; Euro Holds Steady

NEW YORK ( BBH FX Strategy) -- The dollar is trading modestly firmer against the majors in very narrow ranges, gaining some traction after the losses seen Thursday.

The euro is softer, but despite the strong dollar tone seen through most of the week, EUR/USD continues to hold 1.30. Sterling is firmer on the day despite news reports from the UK press indicate that UK Chancellor George Osborne will cut the top rate of income tax from 50% to 40% in next week's budget.

We continue to think a UK downgrade is very likely, as our own sovereign rating model shows the UK at AA. The dollar is a tad stronger against the yen, but needs to push through 84 after stalling out there earlier this week. Global stocks are mostly higher, though the gains are limited as equity markets appear to be taking a breather after another strong up week.

The EuroStoxx 600 is up 0.3%, extending to a new eight-month high with bank shares up 0.4%. The MSCI Asia Pacific index is down 0.2% but S&P futures point to a positive open.

Oil prices have stabilized after the White House denied a decision to tap Strategic Petroleum Reserve has been reached. Rising tensions with Iran could push them higher again.

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It's worth noting that stronger-than-expected U.S. data Thursday did not translate into dollar gains. The transmission mechanism for this relationship lately has been largely through interest rate differentials, and these did not move in the dollar's favor Thursday.

The two-year U.S.-Japan spread rose to an intraday high around 30 basis points Thursday before falling back to 24 basis points, where it currently stands. The 60-day rolling correlation of USD/JPY to the U.S.-Japanese two-year yield at 0.93 is now back at highs not seen since 2010. The two-year rate spread is likely to remain a dominant driver of the USD/JPY but given the shift in speculative positioning in the yen and the potential for a reversal, some further consolidation seems likely for this pair before moving higher.