The dollar stuck in ranges against the euro on Friday as dealers wondered whether the dollar's recent rally was fading ahead of key testimony on monetary policy from Federal Reserve Chairman Alan Greenspan and the release of US asset flows data for December. A key driver for the dollar's direction will likely be Greenspan's semi-annual testimony to Congress next Wednesday and Thursday.
Financial markets will be looking for signs whether the US central bank will maintain the pace at which it has been raising official interest rates.
"I think the Greenspan speech is the be all and end all" for the dollar's performance next week, said Todd Elmer, foreign exchange strategist with Barclays Capital in New York.
Currency traders in particular may focus closely on whether Greenspan expands on recent upbeat comments he made on the prospects of shrinking the US current account deficit; comments which helped to accelerate the dollar's recent rally.
Others said the US asset flows data for December, released by the Treasury Department, would be a key factor for the currency. This report is notoriously hard to forecast, but analysts are expecting net inflows of roughly $60 billion, just enough to offset the monthly US trade deficit, which is a persistent weight on the dollar.
Among other economic reports, US retail sales for January - a gauge of consumer activity - could be one catalyst for the dollar, analysts said.
Late in New York on Friday, against the dollar, the euro was at $1.2865 down 0.1 percent from late Thursday in New York.
The euro has trimmed gains after rebounding Thursday to about $1.29 but failing to breach $1.2920, which many analysts view as a pivotal point.
"Maybe the correction we've seen in the past several weeks with the euro coming down from $1.35 is not complete yet. Maybe we have to move down to $1.25 before the euro starts moving back up," said a trader with Brown Brothers Harriman in New York.
Traders said Thursday's spurt was due in part to the euro's perhaps overly rapid 6 percent tumble over the past month.
The dollar edged lower to 105.71 yen, down about 0.1 percent on the day. Against the Swiss franc, the dollar was 0.2 percent higher at 1.2103 francs.
Sharp differences of opinion exist on how the market expects the dollar to trade in the near term.
The euro's steep fall against the dollar in January "suggests (that) the probability of another extended move lower by euro/dollar (ie 5 percent) in the coming weeks is slim, especially since there is no new information to suggest the dollar's downtrend should be over," said analysts at ABN AMRO in a research note.
Yet Morgan Stanley recently revised its forecasts on the outlook for a firm dollar.
"Having witnessed how quickly and powerfully long euro/dollar positions were unwound in January, we now have more confidence that it will be hard to push the dollar down, even with immense dollar bearishness in the market," said Stephen Jen, research analyst with Morgan Stanley, in a note.
The latest proprietary data from JPMorgan showed bets against the dollar have been pared back to 1.3 times their average from 1.8 times a week ago.
Bets the euro may strengthen are running 0.8 times their average, JPMorgan said.
The bank interpreted the data to mean that these bets could be on the point of flipping and "support the case that the dollar position liquidation is close to over."
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