Dollar Screams Higher as Poole Talks Up 5.25% Rates (page 1 of 2)

US Dollar - It has been quite a volatile day in the currency markets. The initial reaction in the dollar after the March non-farm payrolls report was rather muted as the market tried to decide what to do with the mixed report. Even though non-farm payrolls increased by a more than expected 211k last month, the 18k downward revision in the prior figure pretty much negated the surprise.

Taking a look at the further details of this morning's release, we see that the unemployment rate ticked lower from 4.8 percent to 4.7 percent, but the manufacturing sector saw more job losses. Additionally, wage gains were modest at best with average hourly earnings growth slowing from an upwardly revised 0.4 percent to 0.2 percent. Given that the market was really looking for an unambiguously good set of data, the market's first reaction was to sell dollars.

However, as soon as dollar bears realized that the rally contained little follow through, profit taking ensued and the dollar began to recuperate its losses, causing the first wave of selling in the EUR/USD. The second wave came right after option expirations at 10am, which opened up the flood gates for a flush down to 1.2100. Traders were looking to the bond market for direction and saw that yields on the 30 year bond shot to 5 percent.

Commodity prices also retraced, adding fuel to the rally. Most reports are crediting the dollar's rise to traders and analysts pricing in another quarter point rate hike in May, which is actually quite surprising since it has already been a widespread belief that we would have at least one or two more rate hikes over the next few months.

With last week's hawkish FOMC statement, we would be surprised to find anyone that may have though 4.75 percent was the top. In fact, FOMC member Poole said in his speech today that 5.25 percent rates is "reasonable given what we know." Therefore this suggests to us that the latest move is just a flush with the only major shift in fundamentals coming from the words of the ECB, who recently signaled their plans to delay their next rate hike to June.

So perhaps the move today was an adjustment of expectations on who would be the more hawkish central bank over the next two months. The week ahead still brings about a lot of uncertainty, including the US trade balance and retail sales report.

The consumer spending figure will be the most important number to watch since it can easily shift expectations once again. The market is worried about housing and the clearest sign that the housing slowdown is being felt by consumers is through spending.

Euro - The Euro fell victim to dollar strength today as the market reacts to the non-farm payrolls report. One of the questions being asked is whether the Euro could fall victim to the sudden change in sentiment like it did last year after the rejection of the EU Constitution.

As it stands now, we can say that the scenario is very different. The European Central Bank is simply delaying an inevitable rate hike rather than completely cutting their tightening cycle short. When voters rejected the EU Constitution, the complete structure of the European Union broke down and the market was left with an uncertain fate.

There was even talk that the Euro could disappear if Italy decides to readopt the Lira. The fears have of course come and gone since then as the market realized that the collapse of the EU Constitution was not synonymous with the collapse of the Euro.