Japan Drives Markets

There is one overwhelming driver in the global capital markets today and its is risk aversion sparked by leaks of radiation from Japan's nuclear facilities.  This has prompted sharp drop in equity markets, a rally in bonds and lo and behold the dollar caught a good safe haven bid.  In addition to the dollar, the yen and Swiss franc are firmer, but the other major and emerging market currencies are broadly lower. 

There are two factors that I think explain the dollar's safe haven bid that it did not have previously.  First, while US Treasuries have rallied, German bunds have rallied even more and this has resulted in a shift in interest rate differentials in the US favor.  The 2-year spread which I continue to find is tracking the euro-dollar exchange rate has moved into the US favor by about 5 bp and at 99 basis points is the lowest since the start of the month.  Second, with oil prices coming off, there is somewhat less talk about petrodollars being recycled.  

In addition, I note that market positioning may also be a factor and the market had accumulated a substantial short dollar position. 

A weaker than expected German ZEW survey gave pushed the euro lower in an already offered market.    The euro is stabilizing after approaching a retracement objective near $.13850.  A break could signal another cent decline.  On the upside $1.3920-40 may be a sufdficient cap.  The dollar is tradinglittle changed against the yen and is well within yesterday's broad trading range.