The US dollar could gain further ground next week, underpinned by the view that other major economies are deteriorating while the United States, the first major casualty of the credit crisis, is showing signs of reviving.
The dollar could also benefit from declining crude oil prices, which have fallen more than $35 per barrel from their record peak last month. Oil continued its decline on Friday, sliding 2 percent to $112.71 per barrel, undermined by worries about slumping demand as global growth slows.
The dollar has risen 1.7 percent on the week and nearly 6 percent in August against the euro. On Friday, it traded at a six-month high of $1.4665, down more than 8 percent from a record peak hit last month.
Against a basket of currencies, the dollar rose to a seventh-month high at 77.252 on Friday, gaining about 1.3 percent on the week, and 5.4 percent this month. Analysts say traders are targeting $1.4550 in euro/dollar in the coming week, although many believe the pair's losses could be capped above $1.4364, which is the January low.
Next week's US economic data should do little to halt the dollar's uptrend, with markets focusing on July's housing starts and producer prices data both due on Tuesday. US housing starts are expected to decline in July but analysts do not expect much of a negative dollar reaction since investors have already priced in much of the housing slowdown.
The market is also looking for an increase in producer prices and a stable core number for July and this should have just a modest impact on the dollar, after currency investors largely shrugged off higher-than-expected inflation figures this week.
FOCUS ON JACKSON HOLE, EURO ZONE DATA: Investors will also focus on a gathering of policymakers next week in Jackson Hole, Wyoming, for the Kansas City Federal Reserve's symposium. The event will culminate with remarks from Fed Chairman Ben Bernanke and currency traders will be on the lookout for market-sensitive comments on the economy and rate expectations that could provide a further boost for the dollar versus the euro.
In the euro zone, the main focus will be on Tuesday's release of the German ZEW survey on economic sentiment, followed by services and manufacturing Purchasing Managers Indexes for July due on Thursday. The reports, analysts said, are likely to confirm weakening economic conditions in the euro zone. The data should keep the euro under pressure with investors shifting their focus away from inflation to growth. As the euro sinks further, more and more analysts have become convinced that the dollar has made a genuine recovery.
Goldman Sachs, for instance, has abandoned its 10-year bearish stance on the dollar, its view supported by the contrast in growth and rate expectations between other major economies and the United States.
The largest US investment bank pointed out that a steadier US economic outlook and falling oil prices should underpin the dollar. It added that the currency's undervaluation could lead to a substantial improvement in the country's balance of payments position.
Morgan Stanley also turned bullish on the dollar, but with some reservations. The bank's economists continue to believe the worst is still ahead for the US economy and have repeated their call "for a real, albeit mild, US recession and a bust in corporate profits." Still, the currency market has spoken and Morgan Stanley is not one to get in the way of the dollar's bullish trend.
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