NEWS / Foreign Exchange

Paulson??™s ???strong dollar??™ does not convince

• US Treasuries drift in tight range on Friday
• European bonds remain below key support levels
• Paulson??™s ???strong dollar??™ does not convince
• Stock markets in euphoria

The EUR/USD pair went for a new test higher early on Friday and succeed to move up the 1.3630 zone; A test of the record highs looked around the corner, but soon enough the momentum was lost, without any fresh news and some profit taking kicked in gradually. The fact that there was no news could maybe be enough of an explanation to see why a break to fresh record levels is impossible for now.

ECB??™s Trichet also pointed out during the day that the FX market should be aware there are two way risks in one way bets and that US Secretary Paulson has said that a strong USD was in the US interest. Over the weekend Paulson himself confirmed that. That took the edge of things somewhat but in fact is nothing new and the US strong dollar policy has been a hollow slogan for a long time.

Something convincing will likely be needed to make a break above the EUR/USD 1.3660 record highs in a sustainable fashion. With a virtually empty calendar that always looked somewhat difficult today. The pair gradually dipped slightly to the 1.3590 area, where it is still at this morning.

In the longer term, a solid euro bias is kept in place. Nobody seems to be scared of a strong euro. The view behind this is that there is some decoupling between the US and EMU eco cycle and the euro zone can digest the present currency strength. As long as this theory floats, this can be used as guiding principle for sentiment.

USD/JPY on Friday ticked up from the mid 118??™s to the 119 area intraday. Art the start of this session, the USD tried to get some help from US Secretary Paulson??™s comments on a strong dollar, but this uptick soon petered out.

Indeed, this morning, the yen strengthened significantly, as USD/JPY shot lower from the 119 zone to the 118.30 zone. This seems instigated by the upgrade by S&P of Japan??™s sovereign rating from AA- to AA. The yen liked it. Its longer-term effect could be minimal tough.

We continue to have great difficulty believing in a sustained yen comeback. There is no momentum visible in eco data or in the BoJ rate policy. That would be needed to keep the yen on a rebound trajectory. For now, this pair seems delivered to the daily USD sentiment tribulations more than anything else.

We even see a risk for the yen this week as the BoJ seems more likely to downgrade its inflation outlook in its Outlook for Economic Activity and Prices, to be released 27 Apr. That could be a signal for a longer pause in rate hikes, although the BoJ will never call it that way. CPI is also due for release on Friday??¦

We feel this pair is captured in a range trading environment (115-122?) as neither of the two currencies seems to be well underpinned for now.

The EUR/GBP pair dipped slightly on Friday as the euro couldn??™t go for a test of the upside in EUR/USD and this at the end of a good week for the single currency gave rise to some slight profit taking.

We found the recent sterling performance disappointing. The window of opportunity was there as the UK adapt showed strength and the market was pricing in a May rate hike in the UK and still one more later on. Instead nothing much happened in EUR/GBP of late. The sterling has the bad luck to run into a ???hot??™ euro, which drew all market attention on itself.

It is clear that such an up-hill battle against the single currency is tough mission. As long as the euro has got this kind of momentum, the timing may be wrong to go for a sterling comeback.

We have already turned more neutral on this pair. We now first want some signals that things are cooling down in the EMU/euro momentum, at the same time keeping one eye on EUR/USD, if this pair can test the 1.3660 zone.