Dollar Retreat Limited By Upbeat Fed Comments

The dollar's overnight retreat was rather shallow as the greenback recovered after comments from San Francisco Fed Williams. He noted that the labor market has clearly "improved since September", and that the Fed could reduce the pace of the open ended asset purchase "as early as this summer". He also noted that if "all goes as hoped", the Fed would even end the program "some time late this year". Alhough he emphasized that it still needs to "take further gain" to meet the "substantial improvement" test for ending the program. He projects U.S. growth to be at around 2.5% in 2013, and 3.25% in 2014. And Unemployment is expected to drop back to 7% by end of 2014, and then ease further to 6.5% in late 2015. He expected inflation to climb slowly, and to stay below the Fed's target of 2% over the next few years.

Technically, the dollar index recovered from yesterday's low of 83.45, and is back at 83.85 at the time of writing. The dollar is staying in range against other major currencies except the Aussie, which remains the weakest currency this week. U.S. equities retreated mildly overnight with the DOW and S&P 500 closing down mildly. Note that treasury yields pulled back sharply with a 10 year yield down to 1.865% compared to this week's high of 1.975%. The 30 year yield dropped to 3.086%, down from this week's high of 3.199%. The retreat in yields could possibly limit the dollar's rally attempt.

The euro is stuck in range against the dollar, and is staying soft against the sterling after this week's GDP disappointment. Even Germany's GDP grew a mere 0.1% qoq back in Q1. German Chancellor Merkel urged leaders to "coordinate our national economic policies, including investments and labor costs" to survive the current downturn. She emphasized the need to coordinate "not just on fiscal policy but on economic policy as well". French president Hollande also called for an integrated economic government for the bloc, including harmonized fiscal and welfare policies as well as economic and political decisions.

On the data front, New Zealand PPI inputs rose 0.8% qoq in Q1 while PPI outputs rose 0.8% qoq, both above expectations. Japan machine orders rose 14.2% mom in March. Canadian economic data will be on focus with CPI being featured. The U.S. will release U of Michigan sentiment and leading indicators.