NEW YORK (BBH FX Strategy) -- The U.S. dollar is finishing the week, month and quarter on the defensive. The euro appears poised to challenge the $1.34 area that capped it earlier in the week, while sterling is trading above $1.60 for the first time since last November.Demand is driven from short-term players as well as asset managers. Sterling has been particularly resilient over the past week or so amid merger and acquisition reports. The greenback is also sporting a softer profile against the yen, with a marginal new low for the week recorded in early Europe after a dip below JPY82.00.
The second focus is on the European finance minister two-day meeting that begins today. The idea of a larger firewall until the middle of next year is the main issue, but should Spain or Italy need assistance the firewall is likely to prove insufficient. There may also be some agreement on personnel changes, including Juncker's replacement (likely Germany's Schaeuble). We remain concerned that below the surface, the situation in the eurozone is actually deteriorating. It is not only a matter of a deeper economic downturn, but several policy developments are worrisome. An example of this deterioration Friday is the report out of Germany that the Bundesbank has indicated that it will no longer accept government-backed bank bonds as collateral from Greece, Portugal or Ireland. The European Central Bank meets next Wednesday rather than Thursday due to the Easter holiday. On the data front, earlier today France reported its first increase in household consumption in four months (February 3.0% month over month vs 0.2% consensus). On the other hand, Germany reported an unexpected decline in February retail sales (-1.1% vs expectations of +1.2% following a 1.2% decline in January). The firmer CPI flash figures may have the ECB see upside risks to inflation, even as the real economy stagnates or worse.