While the US trade deficit showed an unexpected improvement in February, any lasting market enthusiasm was firmly misplaced. Energy prices continue to rise while China remains resistant to further currency flexibility.
We see that elevated oil prices and a continued Asian central bank intervention ensures that foreign demand for U.S. treasuries remains strong during January.
Whereas Asian demand for US bonds is unlikely to end any time soon as a conscious policy decision, the reversal of petrodollars from the US bond market remains the greatest threat to the dollar in 2006.
February's data support the view that the U.S. labor market remains strong, particularly on the services side, with unemployment solidly below the 5% level. The Fed is likely to continue raising rates for the foreseeable future.