Safe haven buying is expected to bolster the US dollar again in the coming week, extending the strong gains for the US currency already seen in 2009. While the dollar ends the current week on a negative note at current prices, analysts expect the dollars underlying strength to return as investors remain risk averse.
The Labour Department on Friday reported the unemployment rate surged to 8.1 percent in February, the highest level since December 1983. The dollar was down ahead of the unemployment report on expectations it would be worse but weakness in the US economy has been largely discounted and investors will return their focus to what lies ahead, analysts said.
"Risk aversion will continue to dominate and the move into the US dollar as a safe haven will continue," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
Risk has been the dominant theme for months in global financial markets as the US subprime mortgage meltdown spilled over into other asset classes and the world economy. But with the US government taking large and relatively quick response initiatives as other governments waited, investors now see the worlds largest economy as being the first to recover.
European Central Bank President Jean-Claude Trichet said on Thursday that euro zone inflation had cooled and growth was likely to remain weak in 2009. The comments came after the ECB cut interest rates, as expected, by half a percentage point to 1.5 percent, a record low.
The Bank of England earlier the same day cut its benchmark rate by 50 basis points to a record low of 0.5 percent. By contrast the Federal Reserves target fed funds rate was cut to the zero to 0.25 percent range in December and investors have been willing to overlook a small return for security. The US 10-year Treasury bond yield was last around 2.8 percent.
"The dollar continues to have a strong bid thanks to rate cuts from both the BoE and the ECB," said Andrew Bekoff, chief investment officer at LPB Capital LLC, a Doyleston, Pennsylvania-based wealth management firm. "Aggressive rate cuts and weakening global economies are pushing the fear trade into the greenback."
For the week the dollar rose 0.4 percent against the yen to trade at 97.92 yen. The euro was down just slightly against the dollar for the week, changing hands at $1.2666. The euro has lost 9.4 percent for the year to date against the dollar with declines in seven of the last 10 trading weeks. The US currency is up 8.1 percent against the yen in 2009, posting gains in six of the last 10 trading weeks.
"All eyes will be on the $1.24 support in euro/dollar and 101.80 resistance in dollar/yen as the next upside targets for the dollar in the event of renewed break of the 2.0 percent in 10-year yields," said Ashraf Laidi, chief market analyst at CMC Markets in London. US data and event risk scheduled for next week includes wholesale inventories data for January on Tuesday which are expected to fall 1.1 percent, according to a Reuters poll.
The same day, Federal Reserve Chairman Ben Bernanke speaks on "Financial Reform to Address Systemic Risk" at a Council of Foreign Relations event in Washington. Wednesday sees the release of the federal budget balance for February, which is expected to show a deficit of $202.5 billion.
US retail sales for February and initial weekly jobless claims are set for release on Thursday. Retail sales are expected to decline 0.5 percent overall and 0.3 percent excluding automobiles. Initial jobless claims are expected to rise 645,000 leaving continuing claims at 5.13 million. Later on Thursday, a report on January business inventories is expected to show a fall of 1 percent.
Closing the week on Friday, the January international trade report is forecast to show a deficit of $38.1 billion. In a separate report, import prices for February are seen falling 0.8 percent and export prices down 0.2 percent. Later in the Friday session, the Reuters/University of Michigan consumer sentiment survey is forecast to show a reading of 55.5.
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