Dollar Eases, Australia Surprises, ECB Awaited

By Marc Chandler:The May Day holiday has limited market participation, but has not prevented surprises. The Reserve Bank of Australia kicked off the celebrations with a 50-bp rate cut.

With an increasing number of market participants expecting a rate cut from the ECB at next week's May meeting, Goldman Sachs is piling on in a considerably less exuberant manner than the crash lower in peripheral bond yields would suggest. EURUSD reversed its gains very rapidly as Goldman slashed its growth forecast from -0.5% to -0.7%, expects a 25bps cut next week, but notes that this is "largely cosmetic" with few real implications for the economy.

Marc Chandler submits:One of the most important developments in recent days has been the sharp backing up of global interest rates, spurred primarily by indications that, contrary to expectations, U.S. fiscal policy is in play again beyond simply preventing the expiration of the 2001 and 2003 tax cuts. While the rise in U.S. rates has helped keep the dollar supported, we are concerned that two-year German rates have risen even faster than two-year U.S.

Marc Chandler submits:The US dollar is firm against the safe-haven yen and Swiss franc but is winding down the week on a softer note against the euro, sterling and the dollar-bloc currencies. Most emerging market currencies are firmer too in an environment in which investor anxiety levels appear to have eased. After initially slipping in Asia to new lows here in September near $1.2642, the euro recovered with the help of scatter talk of official or quasi-official interest.

Marc Chandler submits:The US dollar is narrowly mixed in a relatively quiet, though choppy, trading. The euro has largely been confined to a $1.1920-$1.1990 trading as the market awaits fresh trading incentives. There is some talk of Asian sovereign interest in the single currency, though market sentiment remains overwhelmingly bearish. The dollar-bloc is seeing yesterday’s gains pared, but here too a consolidative tone is evident. Sterling and the yen are also little changed in fairly narrow trading ranges.

Marc Chandler submits:The US dollar has surrendered yesterday’s gains in most of the major foreign currencies, after the upside momentum stalled in North America yesterday. The recovery in US equities helped arrest the heightened anxiety seen before the weekend and early Monday. Constructive data from Japan in the form of a smaller than expected decline in the tertiary index (-0.2% vs. expectations of -1.0%) , a higher than expected UK CPI (3.4% year-over-year vs.

Marc Chandler submits:Three important developments to note:1. In our discussion with clients and policy makers over the past 3-6 months we argued that one of the potential surprises that few were prepared for was a stronger dollar. The Deputy Governor of the PBOC was quoted from Davos making a similar assessment. "To me, the big risk this year is the dollar carry trades. It is a massive issue.

Marc Chandler submits:The US dollar is mostly firmer today after yesterday’s surge.