A cautious optimism is the best way to describe my feelings on where the S&P is headed while the dollar is most likely to see some measure of decline, at least in the early going this week.

S&P

The market suffered a late-day sell off on Friday after rumors of a South Korean naval vessel being sunk as a result of a conflict with North Korea spread. The won also dropped against the dollar. However, “given the investigations by government ministries so far, it is the government’s judgment that the incident was not caused by North Korea, although the reason for the accident has not been determined yet,” a senior government official was quoted as saying by Yonhap news agency in South Korea.

Presidential Blue House spokeswoman Kim Eun-hye earlier said there had been no unusual movements by North Korea.

Purchases are expected to have increased by 0.3% and incomes likely rose 0.1% in Monday’s report from the Commerce Department. Sales have been increasing for the last 4 months while incomes are looking for a second monthly gain.

The Conference Board’s confidence index, scheduled for release on Tuesday, probably increased to 50 from 46 in February.

On Friday, economists are expecting to see a gain of 190,000 jobs in March, the biggest increase for 3 years.  Some of the boost is expected to come from the hiring of temporary government workers to conduct the 2010 Census and from better weather. The unemployment rate is expected to hold at 9.7% for a third straight time. Unemployment peaked at 10.1% last October.

From a technical viewpoint, price has appeared to have found support near the former resistance at around 1150 and the longer it holds above this level, the more confidant investors will feel.

The Dollar

We’ve been down this road before, but it appears as if traders are satisfied with the latest developments regarding the Greek debt situation. A plan announced at the conclusion of meetings in Brussels on Friday which will involve the use of a joint IMF-EU backstop, should one become necessary, led the euro to a 124 pip gain on the day.

What has become evident is that the Federal Reserve now seems far more likely to make a move on interest rates ahead the ECB, although when exactly that might happen still appears to be a ways off. Bernanke reiterated that the employment situation is still “very weak” during congressional testimony last week and reports showed that inflation continued to remain tame.

In fact, dis-inflation seems to be the rule of the day. Core CPI rose just 1.3% in the year to February and the trend appears to be slowing as well; the core measure rose just 0.8% annualized in the 6 months to February, less than half the 1.9% increase seen in the prior 6 month period. In the last 3 months, core has risen at an annual rate of just 0.1%.

However, current monetary policy was implemented under emergency conditions and the facts are that the situation has changed. Credit spreads are low and corporations have easy access to capital markets. Profits are expected to increase by 30% this year and the economy could see 3% growth. Quantitative easing (aka the printing of dollars), will officially end this month although the Fed has left the door open to additional measures, should they become needed.

Bottom line-the dollar is most likely to continue its strengthening trend as the year progresses, especially against the euro. In my opinion, $1.20 to the euro, and even below, is well within the realm of possibility under the current economic outlook.

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