Dollar Extends Gains on Stronger Data

The rally in the U.S. dollar and modest rise in Treasury yields this morning indicate that investors continue to adjust their positions for a potentially earlier increase in interest rates. By saying that tightening will begin 6 months after QE ends, Janet Yellen has given investors a targeted timeline to base their positions. Today’s better than expected U.S. economic reports also reinforce the Fed Chairman’s upbeat assessment of the economy.

With weather disruptions behind us, manufacturing activity is beginning to improve. The Philadelphia Fed manufacturing index surged to 9.0 in March from -6.3 in February and leading indicators rose 0.5% last month compared to a forecast for only a 0.2% rise. The outlook for labor market remains positive with jobless claims rising less than expected from 315k to 320k. Claims have been hovering near 4-month lows for the past 2 weeks which a continued recovery in the labor market. Although continuing claims increased more than expected, it had very little impact on the dollar because it won’t change the central bank’s taper plans. Existing home sales declined slightly but the 0.4% pullback was right in line with expectations. Today’s stronger U.S. economic reports should keep the dollar bid. Forex traders should monitor the movement in U.S. yields. While we are looking for 10 year Treasury yields to hit 3% in the coming months, unless it does so quickly, the rise in the dollar could be gradual.

One of the currencies hit the hardest today is the euro. Weaker German producer prices add to the central bank’s concerns about inflation and widen the gap between U.S. and Eurozone monetary policies. Tensions between Europe and Russia remain high with Germany warning about additional sanctions if they fail to ease crisis in Crimea. However with Ukraine waving the white flag by preparing to pull its military out of Crimea, the Ukraine government could be talking its own steps to ease the standoff in the region.

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