Dollar Mixed, Underlying Themes Reemerge

The US dollar is broadly mixed, losing ground against the euro, sterling and dollar bloc, but gaining against the the Swiss franc and even more so against the Japanese yen.  Commodity prices are firmer.  Equities were lower in Asia and began lower in Europe before recovering.  

The dollar reached its best level against the yen since April 27.  The resumption of the so-called risk-on trades have "naturally" weighed on the yen.  In addition comments from the BOJ Governor Shirakawa leaves the door open for additional action.  This additional action comes as QEII draws to a close for the US and the ECB and RBA will continue to normalize policy.    The JPY82.00 area offers the next level of resistance.  Note that in the stronger dollar environment, the yen has fared the best among the majors, only losing 0.58% against the dollar this month.  If the dollar weakness resumes, as I suspect is likely, the yen is likely to lose on the crosses and this may weigh on it against the greenback. 

In Europe, the UK reported stronger than expected inflation figures, with April CPI jumping 1.0% for a 4.5% year-over-year rate.  The core rate also rose to 3.7% from 3.2%.  While short sterling futures strip implies 2-4 bp higher rates, the report is unlikely to change the BOE's stance.  King has been clear that inflation is due to temporary factors.  Last week's quarterly inflation report indicated the the BOE does not think inflaiton has peaked.    If the dollar is going to soften in the days ahead, sterling could move toward $1.6380 and possibly toward $1.6450. 

Germany reported a softer than expected ZEW survey, but after last week's stellar GDP report, any softness in German data can easily be shrugged off.  Successful Spanish and Greek bill auctions are net positives.   The euro is still within yesterday's trading range against the dollar.  The high on Monday was $1.4245.  This has to be challenged to target the $1.4350 area, which may be the key to the near-term outlook.