Currencies Trade Higher As Yields Retreat

The U.S. dollar is trading lower against most of the major currencies this morning thanks to the recent steadiness of global bond yields. U.S. 10-year yields are trading below 2.5% this morning, European and Asian bond yields have fallen across the board while overnight SHIBOR rates in China have settled around 5.56%. If you recall, the recent havoc in the financial markets was caused by the spike in U.S. and Chinese yields last week and now that they have retreated, volatility has declined with equities and currencies trading higher.

This morning's U.S. economic reports were in line with expectations with personal incomes growing 0.5% and personal spending growing 0.3%. The healthy trend of stronger income versus spending is a dynamic that the Federal Reserve will be very happy to see because it signals that Americans will be more frugal with their spending. The PCE deflator rose 0.1%, which suggests that inflationary pressures are beginning to increase. Jobless claims on the other hand dropped from 355K to 346K, a number that is generally consistent with a continued recovery in labor market. These reports kept the dollar bid against the Yen but failed to have much impact on its performance against the euro.

Fed Speak
Later this morning, Fed President and FOMC voters Dudley and Powell will be speaking on the labor market and monetary policy. Both of these policymakers typically favor a dovish monetary policy stance and if they support Bernanke's view that asset purchases should be tapered this year, the EUR/USD could retest 1.30, but if either express skepticism or reservations about Bernanke's timing on reducing asset purchases, the EUR/USD could make its way back up to 1.31.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.