The US dollar is likely to remain under pressure in the week ahead, with investors taking their cue from stock markets and the Federal Reserve. The Fed is widely expected to cut the federal funds rate by another 0.5 percentage point at its two day meeting ending next Wednesday, sending the benchmark US interbank overnight lending rate down to 3.0 percent.
On Tuesday this week the US central bank surprised investors with a 0.75 percentage point cut, after several days of steep falls in stocks markets around the world. That move helped calm investors and saw many buy assets which typically provide higher return for higher risk, such as stocks.
"It's all about the amount of risk," said Steve Malyon, a currency strategist at Scotia Capital in Toronto. "If equities sustain their latest pop then the dollar should weaken against the euro, aussie and kiwi." While the dollar generally benefits from safe haven flows when equity markets are falling, the reverse is true when equity markets globally are rising, with some investors selling the dollar to buy assets in other currencies.
For the week, the New York Board of Trade's US dollar index, which measures the dollar against a basket of currencies, fell 0.6 percent. The benchmark Dow Jones industrial average gained 2.3 percent. The euro gained 0.7 percent against the dollar and the dollar rose 0.8 percent against the yen.
But there is some risk that the Fed may not be so aggressive in lowering rates next week and may disappoint investors who are betting against the dollar, analysts said. Thursday's news from French bank Societe Generale that a "massive fraud" by a junior rogue trader punched a $7 billion hole in the bank's finances has left some wondering if market volatility this week was because of that single event rather than overall concern about the US economy.
"Now we have the SocGen news it is raising doubts we will get a 50-basis point cut from the Fed," said George Davis, chief technical analyst at RBC Capital Markets in Toronto. "If Monday's (world-wide equity) meltdown was likely due to some other event, the Fed may be less aggressive."
The caveat is that with the Fed cuts next week priced in, any deviation from expectations, particularly if the Fed does not cut, could see the dollar move higher. "The market is pricing in anywhere from 50 to 75 basis point so unless the Fed does something more, the dollar is likely to be stronger," said Win Thin, senior currency strategist at Brown Brothers Harriman & Co.
"There has been a ton of bad news and yet the euro can't make its old high." Given market volatility and the Fed meeting, US economic news is likely to take an economists forecast a 1.5 percent gain. Investors get their first look at US fourth quarter gross domestic product on Wednesday, and economists expect 1.3 percent growth. Friday, the week concludes with January's jobs report with economists forecasting a rise of 50,000 non-farm jobs.
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