Dollar Mixed

The US dollar is mixed today.  The dollar-bloc is softer, led by the New Zealand dollar.  Th yen and Swiss franc are slightly softer as well.  The euro is firmer, as the pullback to $1.4780 in Asia was snapped up.  The persistent purchases of euro on relatively modest corrections and the rising interest rates suggest the late positioning in favoring more hawkish ECB.    Sterling is also firmer, but the slew of economic data has been poor, including service sector PMI (53.3 vs 56.4 in March) and is the weakest since last December, and soft Nationwide home price index and mortgage lending and approval figures. 

Euro zone data was not much to write home about.  Service sector PMI was lower than the flash (56.7 vs 56.9).   Both German and French readings were lower than their flash reports and Italy also came in on the soft side.  Spain though ticked back above 50 from 48.7 last.  Spain also report slightly better employment data as April unemployment eased for the first time in 8 months. 

On top of this, euro zone retail sales were dismal, falling 1% in March.  The market had expected a flat number.  The only bright spot was that the Feb reading was revised from -0.1% to 0.3%.   On a year-over-year basis, euro zone retail sales are off 1.7%.  Some of this may be a skew caused by Easter, but there are clearly headwinds on domestic demand.   Separately, Norway also reported soft March retail sales. 

The US-German 2-year spread has widened sharply in the first half of this week.  It finished last week at about 117 bp and now is standing near 130 bp.   Portugal's preliminary package acts as a catharsis, easing some strain on the periphery, which did not appear to hold the euro back very much.    A former UK MPC member opined that the odds of a Spanish bailout is increasing seems factually wrong, from a market point of view in terms of the spread between German and Spanish bonds this year or the price of credit default swap insurance.