Dollar choked by inflationary evidence elsewhere

The dollar remains on its heels once again to start the week as an increasing number of reminders keep popping up on dealers' radars reminding them of threats to improvements in its fortunes. Confidence among European investors jumped to a three-and-a-half year high. British manufacturers indicate rising input costs will lead them to raise prices while Australian employers sought new labor for a tenth straight month. Given what we understand about the way the Federal Reserve thinks, each event leaves the dollar marginalized as monetary tightening seems likely to pass it by while policy settings look increasingly likely to be altered elsewhere.

U.S. Dollar - Equity index futures are swinging violently in pre-market trading as some investors attempt to bravely explain away the highest price of crude oil in 29 months as evidence that recovery is entrenched. Besides, they argue, it would take a protracted bout of elevated prices for oil to take a chunk out of the consumers' pocketbook. But the volatility of that thought process has shifted stock futures from a six point gain to a six point loss overnight. Given our introductory list of evidence leaning on other central banks around the world coupled with the plausible prospect of an economic slowdown engineered by rising energy costs, the dollar index remains on the defensive and trades 0.3% weaker at 76.20. While it may prove to be too early to gauge the impact of the recent bout of rising gasoline prices on consumer psychology, the February spending report is one of the items on the economic calendar later in the week that will be closely watched. For now, there seems little reward to be had from being long the dollar on geopolitical grounds. After all how much worse could unstable Middle Eastern affairs become given the pro-democracy nature of protests?

Euro - The euro traded above $1.4000 for the second day. The market was clearly awaiting an outlier event on Friday in terms of a dollar-boosting non-farm payroll reading on Friday. In the event a reading of 192,000 additional jobs was neither too hot nor too cold and allowed euro bulls to continue safely preparing for an interest rate increase at the first opportunity. Today the single currency was further buoyed by a rise in the Eurozone investor confidence index from Sentix research institute. It measured enthusiasm from respondents at the highest since September 2007 although not without blemishes. The current index within the report was firmer but a forward looking index of expectations eased between months on account of rising energy prices and fears that instability in the Middle East might worsen. On Monday the euro reached its strongest against the dollar since November at $1.4036.

British pound - Trade body CBI warned the government over allowing inflation to become entrenched in the national psyche. The pound jumped on the news and was equally bolstered by a quarterly index from the Engineering Employers Federation where the balance of manufacturing members reporting price increases outpaced those cutting prices by 39%. In the fourth quarter the index reading was 16%. Faced with rising crude oil prices many manufacturers are affected at some point in the production process by rising energy costs and this is evident in today's reading, which was the highest since the report began in 2000. The CBI said that it expected on mild medicine from the Bank of England and scribbled in a couple of rate increases starting before the summer. The pound was again revived by the report and ran up to $1.6341 against the dollar. It has since stumbled to $1.6274 and is practically unchanged on the session.

Japanese yen - The Nikkei slumped 1.9% overnight and worse than the broad performance of regional stocks where the MSCI Asia Pacific index declined by 1%. The yen rose versus the dollar as need for safety appeared to be increasing. This trend of outperformance versus the greenback against the backdrop of rising geopolitical worries has been pretty evident recently. Note that following the U.S. employment report the immediate reaction was a boost for the dollar to beyond JPY83.00. This morning as the equity market appears hemmed in by rising oil prices the yen is gaining and recently traded at JPY82.09.

Aussie dollar - The Aussie was lower overnight as Asian benchmark indices followed through on a weak close on Friday after rising oil prices detracted from the improvement in the labor market. An index of job advertisements in the media rose for the tenth consecutive month in February rising by 1.2% after an upwardly revised 3% gain the prior month. The Aussie hit $1.0117 U.S. cents at its worst before a wave of optimism in the European time zone lifted appetite for it. The unit reached a high more recently at $1.0185 cents.

Canadian dollar - The Canadian dollar continues to trade with the wind at its back. The American labor market recovery bodes well for Canadian exporters while exports of Canadian crude oil continue to feel the benefit of elevated pricing power. At the end of the week a domestic report from employers is due to show continued recovery in local output and its impact on the labor market. The unit remains in the black to start the week and recently traded at $1.0300 U.S. cents.