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.
As such, we would recommend not chasing this pair higher here. The dollar has stalled out around 84, which needs to be cleared before testing the next objective around 85.50, the high from April 2011. Similarly, the two-year US-German spread fell from 16 basis points to 8 basis points Thursday and currently stands at 7 basis points, less than half of the 17 basis points at the start of the week. With the euro seeing a bounce after the failure to take out the 1.30 level, we need to see these interest rate differentials turn higher for the dollar to give the dollar rally another boost; 1.31 may be a good level to go short the euro.