Global Themes

America’s dollar was mostly steady Tuesday as strength against the yen helped offset weakness against the buoyant euro. The euro continued to bask in the afterglow of weekend elections in France that suggested a pro-business and market-friendly candidate was on track to become president of the No. 2 nation in the euro zone. The risk of both the euro zone and the broader European Union unraveling dissipated in a meaningful way with centrist Emmanuel Macron finishing first in last week’s preliminary election and projected to take the next and final round of voting on May 7. The pace of the euro’s rally decelerated somewhat in the run-up to a meeting of the European Central Bank on Thursday. Improved risk tolerance was a negative for the safer yen while the loonie crashed to December lows amid intensifying trade tensions with the U.S. Today brings U.S. data on consumer optimism and housing.


The euro held strong but the pace of its rally cooled somewhat with markets mindful of Thursday’s ECB meeting. The euro shot to five-month highs this week after weekend elections in France pointed to the bloc holding together and not fraying at the seams. The market-friendly centrist Emmanuel Macron appears in pole position to become the next leader of France. He still has to beat anti-euro rival Marine Le Pen in the final vote next month but polls suggest Mr. Macron would win decisively. Fundamentals will also come into play for the euro as the ECB huddles Thursday to consider its policy settings while President Mario Draghi will weigh in on the growth picture. While easing political uncertainty could hasten a move toward 1.10, the single currency could also fall prey to profit-taking, particularly if Mr. Draghi remains concerned about underlying inflation remaining too low.


Sterling favored session highs as most European currencies remained buoyant in the wake of easing political uncertainty in France, one of the bloc’s biggest economies. Britain, meanwhile, is also home to reduced political uncertainty ahead of snap elections in June. Looking ahead, the pound faces a daunting set of U.K. growth data on Friday that’s forecast to show the economy hit the brake over the opening quarter of the year. The pound’s rebound to six-month highs last week, coupled with a poor showing for the economy last quarter, would risk quieting nascent calls for an earlier U.K. rate hike, a scenario that would leave the pound vulnerable.


The yen has been among the biggest losers of the election headlines coming from France which have tempered fears of European integration falling apart. The resulting risk party and rally for stocks and higher yielding currencies will leave the yen vulnerable to further short-term weakness. Still, global uncertainties and doubts over the U.S. administration delivering the economic goods any time soon could help slow the pace of yen depreciation. Next up for the yen will be a Bank of Japan policy decision on Thursday.


The loonie crashed to fresh 2017 lows as local economic uncertainty flared after the Trump administration announced tariffs of certain lumber exports that Canada sells to the U.S. Trade is a cornerstone of the Canadian economy and news that the U.S. plans to slap a 20% tariff on softwood exports spells potential economic trouble. Renewed weakness in oil, which remained below $50, had already left the commodity reliant Canadian currency in a bit of a pickle. The U.S. duties on Canadian goods underscore the ‘significant uncertainties’ that the Bank of Canada worries about.


The dollar was generally steady as gains against the yen helped offset losses against the euro. U.S. fundamental will be in focus this week and may not do much to liven up the dollar’s spirits. Forecasts call for a reduction in consumer confidence and new home sales, numbers due today at 10 a.m. ET. The week’s main event will be U.S. Q1 growth on Friday that’s forecast to show the economy decelerated to around 1 percent from a 2.1 percent pace in Q4. Still, the growth data may understate the momentum in the economy, a scenario that could keep the Fed on track to raise rates as soon as June.

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