Slowing US economic growth intensified the dollar's sell-off on Friday but a host of potential hurdles in the coming weeks suggest the dollar's path lower may not be quite so clear-cut.
More contemporary US economic indicators, policy meetings from the US, euro zone, UK and Australian central banks and Treasury Secretary Henry Paulson's first public comments are all scheduled for the next two weeks.
Effectively, these events will help provide a more current - and possibly less bleak - picture of the dollar's landscape than that provided by the backward-looking gross domestic product report.
"There's a tremendous amount of event-risk in the next two weeks," said Rebecca Patterson, senior currency strategist at J.P. Morgan in New York. "I'd be careful about chasing this (dollar) move lower." That view was broadly reflected in the currency options market.
Short-dated implied volatilities spiked higher, showing that traders bought options after the GDP data to protect themselves against potentially choppy price swings next week. But one-month volatilities only rose a little, indicating that traders expect the dollar to settle back into familiar ranges in the subsequent weeks. Implied volatility measures expectations for price swings in the spot market over a given period of time.
The abrupt slowdown in second-quarter US growth reported on Friday sent the dollar sliding against the major currencies and pushed the chances of an increase in US interest rates next month to well below 50/50. The euro popped up as high as $1.2770, while the dollar fell 1 percent on the day against the yen to 114.61 yen and was on track to post its biggest one-day decline against the Japanese currency in a month.
J.P. Morgan's Patterson said it is "very premature" to call this the start of a sustained euro bull trend, a view echoed by currency strategists at Brown Brothers Harriman, who noted good resistance from current levels all the way up to $1.2861.
"The euro is flirting with a trendline that connects the early June and July highs. It comes in now near $1.2800 and the high for the month of July was $1.2861. This general area may prove to be a formidable obstacle for the euro bulls ahead of next week jobs data and the upper end of the euro's trading range is likely to remain intact until the FOMC meeting," they wrote in a research note on Friday.
The Federal Open Market Committee meets to set interest rates on August 8. The second-quarter slowdown in growth to 2.5 percent a year from 5.6 percent a year in the prior three months prompted financial markets to slash bets the Fed will deliver an 18th consecutive rate hike, putting the chances of an increase at about one in four.
A pause in the Fed's two-year rate-hiking campaign will erode the dollar's interest rate support. But that may already be factored into the dollar's price, and although it's an outside chance right now, the Fed may still raise rates again.
Before the Fed's policy decision on August 8, three other major central banks meet to set rates. The European Central Bank and Reserve Bank of Australia are both widely expected to raise rates a quarter percentage point next week, while the Bank of England is seen keeping rates on hold.
Meanwhile, in New York Treasury Secretary Paulson on Tuesday will give his first public comments in his new role. He may well talk about currencies, particularly China's tightly controlled exchange rate, which is a source of irritation to many US lawmakers who claim it's a major driver of America's bulging trade deficit. And the US economic data calendar fills up next week, with a slew of releases culminating in the July employment report on Friday.
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