The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( BBH FX Strategy) -- The dollar is modestly firmer but remains confined to tight ranges. The euro is holding on to most of last week's gains, helped by the recent shift in interest rate differentials away from the dollar. The pound is flat ahead of Tuesday's inflation report.
Despite a worrisome eurozone backdrop, interest rate differentials moved sharply against the dollar Thursday and Friday, and helps explain the losses against the euro in particular as the week closed out. The two-year U.S.-German spread stands at 2 basis points, the same as Friday and down sharply from the cycle high of 17 basis points last Monday. Until this widens again, the dollar may come under further pressure against the euro. Dollar/yen has also fallen back after it made a new high for this move around 84.20 Thursday. The two-year U.S.-Japan spread is at 23 basis points Monday and also remains below the cycle high of 28 basis points on Wednesday. We still target the April 2011 high around 85.53, but in the near term, the dollar may have trouble gaining traction until the spread widens again and positioning improves. There were two significant shifts in net speculative positioning in the week ending March 13, according to the latest Commitment of Traders report. The first is an acceleration of the short-covering in the euro. The second is the extension of short yen positions. The fact that the euro held support near $1.30 is important. That is the bottom of the $1.30 to $1.35 trading range that has confined the euro through most of the first quarter. There is scope for the euro to test the $1.3250-$1.3300 area in the days ahead. The dollar may fare a bit better against the yen, but is more likely to consolidate then trend higher. In the week through March 13, the net speculative short euro position was cut from 116.400 contracts to 99,300. It is the first time the net shorts have fewer than 100,000 contracts since early December. The change is almost solely the function of shorts being reduced (16,000) than new longs being established (382). The net short yen position jumped from 19,400 to 42,400 contracts in the most recent reporting week. This is the largest net short position since April 2011.
Since the financial crisis began in the second half of 2007, the net short yen position has been only rarely and briefly larger than it is now. The shift in positioning reflects almost in equal measure longs capitulating (11,000) and shorts being established (12,000).