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Monday, May 21, 2007

EUR/USD: Rate Differentials Remain more USD Supportive

Interest rate differentials between US Treasuries and benchmark German bunds widened quite a bit last week as the anticipation of a Fed rate cut was once again dashed by firmer US data. They maintain much of those recent gains, with spreads on 10-year paper now yielding 49 bp more in the US than in Europe, up from 41 bp in the middle of last week.

Gobs of corporate paper are coming to market this week in the US and will likely find willing buyers as the world remains awash in both USD and liquidity in general. On an outright basis, US yields are at their highest levels in the last three months. Dealers are targeting 4.90% in the 10-year note in the next few weeks. It now yields 4.81. EUR/USD trades just above session lows, at 1.3441.

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