Dollar Chops Higher

The US dollar is mostly firmer, though the yen is a notable exception, amid position squaring.  Global equities are lower on growth concerns and the failure of the US markets yesterday, which extended the losing streak in S&P 500 to the fifth consecutive session.   Growth concerns also seem to be weighing on commodity prices and emerging market currencies. 

The euro tried again the $1.4700 level in Asia and a weaker attempt in Europe and has been pushed back again.  The break of the $1.4640 area warns of a further drop in North American toward the $1.4560-80.  However, be careful of claims about the relationship between stocks and the euro.  The 30-day rolling correlation (on percentage change) has fallen from 0.71 at the end of May to less than 0.47 now. 

Several factors are weighing on market sentiment today, including the sober economic assessment offered by Bernanke and Dudley yesterday, without a suggestion of a policy response.  While focusing on inflation and commodity inflation at that Bernanke spoke of an economy performing well under potential.  He did maintain view of a stronger H2, but the overall tone was somber.  Dudley was blunter.  The economy was "drastically under performing."  

While the US economy and the divergent trajectories of monetary policy has been a key driver in the foreign exchange market, it has been challenged by developments in Europe.  What is striking today is that as Germany's Schauble pushes for maturity extensions in Greece by the private sector, Germany seems more isolated as the ECB, France and the EU seem opposed to anything but a voluntary rolling over of Greek sovereign debt. 

Shades of Belgium in Finland. Finland had an election two months ago and still cannot put together a government.  Katainen gets one more chance and if he fails, Urpilainen, the head of the SDP gets her chance.  A government that includes the SDP and Tru Finns would be more cirtical of aid efforts to the periphery. 

The dollar is below JPY80.  The risk of intervention still seems quite low still.   A key point that many in the market do not see is that the intervention is not aimed at a particular level.  That is a poor predictor of intervention.  A better predictor is volatility and that remains low. 

Many will link the yen's strength to weakness in the equity markets.  However, here too such linkages may be exaggerated.  Another explanatory variable, and a simpler one is that that US-Japanese 2-year yield spread is at the narrowest in more 6 months at 22 bp.  It was at 60 bp a couple of months ago.