Dollar Gains Extended, but Momentum Fades

The US dollar staged a strong pre-weekend
rally on hints that the Fed will raise rates before the end of the year. 

There was initially follow through dollar buying in Asia before a more stable tone emerged in Europe,
where London markets are closed for a
bank holiday.  The easing of the dollar’s upside
momentum may set the stage for a bout of profit-taking later today and

The implied odds of 42% that the Fed hikes
rates in a few weeks may see a bigger push back by skeptical market
  This week’s data is likely to show that neither jobs
nor auto sales sustained the July strength.   

The news stream has been light, and investors
continue to digest official commentary.
  In addition to the Fed’s
efforts remind the markets of the risk of a hike this year, comments from the
ECB and BOJ officials also underscore the divergence meme.  The ECB’s Coeure
warned that without government action, the central bank might have to “dive deeper” into its “operational
framework.”  The BOJ’s Kuroda reiterated his warning that there is
scope for additional monetary stimulus and that the central bank will “act
without hesitation.”

The ECB meets next week on September 8
The BOJ and Fed meet on September 20-21.  

The US reports July personal income and
consumption figures today and the August Dallas Fed manufacturing survey. 
income is expected to rise 0.4% after a 0.2% gain in June.  It would be a
favorable start to Q3.  The three, six, and 12-month averages stand a
0.2%.  Consumption is expected to have risen 0.3% after a 0..4% rise in
June.    Recall that before the weekend, the US revised Q2 GDP
slightly lower (1.1% from 1.2%) but revised up the consumption component to
4.4% from 4.2%.  That is the second strongest quarterly performance since
the Great Finance Crisis.  It is not sustainable.  

As the North American desks open, the US
dollar is firmer against most of the major and emerging market
The Swiss franc and New Zealand dollar are
exceptions.  They are posting minor gains.  The Japanese yen is the
weakest of the majors.  It is off a little more than 0.33%.  The
dollar climbed to almost JPY102.40 before consolidating.  Support is now pegged near JPY101.80.  A move
above JPY102.60-JPY102.80 signals a
resumption of the dollar’s recovery.  

The extension
of the euro’s losses was more marginal.
  Before the weekend,
the single currency hit a low near $1.1180.  The new selling could not
push it through $1.1170.    Intraday technicals are somewhat
supportive.  The near-term potential
may extend toward $1.1240.

Sterling had spiked to $1.3270 in the
immediate confusion over Yellen’s remarks before the weekend and finished near
$1.3120 before the weekend. 
It has been sold a little through $1.3090
today.  The tone remains fragile.  Prime Minister May is holding a
Cabinet meeting Wednesday.  Initial resistance is pegged near $1.3140

The Australian dollar is the heaviest among
the dollar-bloc currencies. 
Its pre-weekend losses to almost $0.7550
from a high near $0.7700 were extended to
$0.7525 in early-Asia.  It managed to climb back to $0.7560 in the
European morning but still looks heavy.  

Although Japanese and Indian equities
strengthened, it was not enough to underpin the MSCI Asia-Pacific Index, which
fell for a second session (-0.25%) and eight of the past 11 sessions.
Nikkei gapped higher and closed near its highs 2.85% above where it had finished before the weekend. 
MSCI Emerging Market equity index snapped a two-day advance to close 0.75%
lower.  The five-day average is has slipped below the 20-day average for
the first time since early-July.  

bourses are lower.
  The Dow
Jones Stoxx 600 is off 0.5%, and all main sectors are lower.
is the weakest of the large bourses, off
1.4%, with bank shares off 1%, giving the pre-weekend gain.  

Although US Treasury yields are 1-2 bp lower,
the rest of the world is playing catch-up to the large moves before the
  Asia-Pacific 10-year bond yields are up mostly 2-3 bp, while
European yields are up 1-2 bp in the core and a bit less in the


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