Dollar Soft, but Rangebound

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is paring back some of its recent gains but continues to trade in tight ranges.

The euro has recovered but stalled out just ahead of 1.33, a key level of resistance. A break of this level would likely open up a move toward 1.350, but we expect economic weakness in the euro zone and concerns about Spain to remain headwinds for the euro. For now, we remain in a 1.30-to-1.33 range.

The Australian dollar is flat near 1.04, after declining for three consecutive days. The yen is also flat on the day, after rallying nearly 1% over the past five days.

Sterling looks set to close the week flat after data and BoE minutes left the door open for another round of QE in May. Global shares are down, with the MSCI Asia Pacific Index down 0.6%. European stocks declined for a fifth day, with the EuroStoxx 600 down 0.3%. Bank stocks are down 0.6%. Commodity prices are firmer and recouping some of the losses Thursday.

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Despite Thursday's dollar rally, most currencies remain in this month's trading ranges. The euro in fact has recovered to the upper end of that range, though the 1.33 area representing the 62% retracement of the February-to-March drop in EUR is offering some resistance.

News from the eurozone is limited Friday, but certainly better than Thursday as Italian retail sales for January came in stronger than expected, rising 0.7% month over month. Prime Minister Mario Monti holds a cabinet meeting Friday, most likely to discuss progress in passing labor reforms.

French business confidence also came in better than expected and rose for the second straight month. So overall, calm has returned, but Spain 10-year yields remain elevated and near 5.5%, suggesting ongoing concerns have not entirely gone away. We need to see a break of 1.33 for the euro upside to open up, perhaps as high as 1.35. U.S.-German two-year yield is 12 basis points Friday, up from 10 bp Thursday.

Dollar-yen has found support for now just above 82. Weekly Japanese portfolio flow data show that Japanese investors have more than doubled their purchases of foreign stocks and bonds this year while foreign investors have cut in half their purchases of Japanese stocks and bonds. The most recent data was released earlier Friday and covers the week to March 17.

There is some indication of Japanese repatriation ahead of the fiscal year end. Japanese investors were net sellers of foreign bills (JPY38.8 billion), equities (JPY57.8 billion), and bonds (JPY721.5 billion). Foreign investors bought Japanese shares (JPY287.5 billion) as they have done every week this year.

On the fixed income side, they sold bonds (JPY1.07 trillion) for the first time in four weeks and parked the money in bills (JPY1.09 trillion). A move to bills makes investors more sensitive to yen movement. As a whole, Japan recorded net inflows of JPY1.13 trillion in the week to March 17 compared with a net outflow of JPY20.6 bln the previous week.

This week the returns in the G10 were mixed but the China slowdown theme emerged as a key driver. AUD (-1.7% vs. USD) and NZD (-1.3%) were the week's two worst-performing currencies, thanks in part to the recent underperformance of Chinese data. Regional trade links remain strong enough that a slowdown in Asian growth would directly impact the Australia and New Zealand economies. In this regard, food exporter New Zealand is likely to be hurt less than resource exporter Australia.

In addition, downside economic data surprises have also weighed on general market sentiment, with stocks and commodities slipping on the week. While the rolling 60-day correlation of AUD/USD and the S&P 500 has recently declined to .64 from a high of .92 in December, the 30-day has been rising to .71 from a trough around .55 back in early February. As such, a fairly strong relationship still persists.

TRY is the best-performing currency amongst major emerging markets this week as hawkish comments offset Turkey's economic difficulties.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.