Muted FX Reaction Shows Economic, Euro-zone Worries Remain

--Muted currency market reaction to U.S. jobs data, Greek deal shows uncertainty reigns
--Neither the euro zone nor the global economy are in the clear yet


LONDON (Dow Jones)--The U.S. economy is creating jobs at a meaningful clip and Greece has finally restructured its debt with private creditors.

So why aren't foreign exchange markets full of the joys of spring after Friday's hefty double dollop of positive news? On Monday, currencies that would usually rally as investor confidence improved were struggling to climb. Some were losing ground.

Among them, the euro, which bumbled along near its lowest levels in almost a month at just over $1.31 to the dollar, and the Australian dollar, which slipped below $1.05 against the buck for the first time since Jan. 25.

The reason: neither the euro zone nor the global economy are in the clear yet, despite Friday's welcome developments.

Greece still has more debt than it can reasonably be expected to pay back in the absence of meaningful economic growth, much like the rest of the southern Europe, say analysts.

"Strong liquidity conditions are a powerful tonic, much as they were in 2009," said Neil Mellor, currency strategist at Bank of New York Mellon, citing the trillion euros of cheap long-term funding recently pumped into euro-zone banks and lingering hopes for a third round of U.S. quantitative easing.

"But at some point we are going to have to revisit these euro-zone issues...Whilst growth remains conspicuous by its absence, these debt dynamics are going to remain awful and I suspect it's not going to take many debt releases from the [euro-zone] periphery to remind investors of the mess that remains," Mellor said.

Worries about the Chinese economy are also beginning to offset the good news on U.S. jobs, which in turn is not mirrored by other U.S. economic indicators, making it difficult to second-guess the Federal Reserve's next move before campaigning for the U.S. presidential elections really kicks in.

An estimated 227,000 U.S. nonfarm jobs were created in February, bringing the monthly average over three months to a robust 245,000, and yet U.S. economic growth in the first quarter is not expected by economists to have improved much on last year's annual rate of 1.7%.

"Economic growth has still been fairly weak so you have higher employment but lower productivity growth," said George Saravelos, a currency strategist at Deutsche Bank.

"So the next milestone is understanding the Fed reaction to this growth mix in the U.S.," he said, with the U.S. central bank's policy-setting Federal Open Market Committee poised to meet Wednesday.

Saravelos said he doesn't expect any steer in this regard until the FOMC meets again April 24-25, but already some in the market sense that hopes for more U.S. easing may be misplaced, helping to explain the buck's recent sturdy performance.

"U.S. job numbers have leant themselves to dollar strength rather than a support for risk appetite," noted Ian Stannard, head of European FX strategy of Morgan Stanley.

But for others, the muted market reaction seen Monday is the shape of things to come as markets juggle with a host of unknowns and are put off from placing aggressive currency bets.

"I wouldn't actually expect a strong trend in the euro-dollar rate over the next few months. It's almost going to feel like the summer," Saravelos said.