Things are not likely to get any easier for the dollar in the week ahead, as fear of more credit-related losses on Wall Street keeps investors anxious about the health of the US economy. Data on consumer spending, housing sales and inflation should help investors gauge how far the economy has travelled on the road to recession.
The dollar fell broadly this week, partly the result of Federal Reserve Chairman Ben Bernanke's warning that growth will slow in the fourth quarter and stay sluggish into 2008. Fresh fears that China and other central banks would speed up purchases of appreciating currencies such as the euro in place of the weakening dollar did more damage, sparking dealers to push the euro to an all-time high above $1.47.
Risk-aversion and a plunge in consumer confidence sent the dollar to a 1-1/2-year low against the yen. Morgan Stanley strategists wrote in a note to clients that it may take the threat of official action from policy-makers to stall the dollar slide.
"Though we believe that the dollar is grossly undervalued, we believe the market is likely to push it lower until Group of Seven countries are provoked into threatening or actually conducting intervention," they wrote. Most, though, see intervention as a long shot, as chances of success would be slim as long as the Fed is cutting interest rates.
That sets up a further dollar slide next week, and analysts say any sign that credit market turmoil and an ongoing housing slump is starting to squeeze consumers will accelerate it. With a fairly full calendar of economic data on tap, that puts Wednesday's October retail sales report in the spotlight.
"If the numbers are not good, that will amount to the other shoe dropping for the dollar," said Ashraf Laidi, chief market analyst at CMC Markets in New York. "It will give people confidence to keep selling dollars as it suggest the housing and credit trouble is hurting individual consumers."
The following are highlight events:
US PENDING HOME SALES FOR OCTOBER: Few expect much sunshine from anything related to housing, and a Reuters poll finds economists bracing for a 3 percent decline in October after a 6.5 percent slide the prior month.
BANK OF JAPAN MONETARY POLICY DECISION: With price pressures still tame, economists expect officials to maintain rates at 0.5 percent, the lowest in the developed world. And with carry trade unwinds putting upward pressure on the yen, using momentary policy to give it an extra push could be particularly disruptive for markets right now.
US RETAIL SALES FOR OCTOBER: Economists are expecting to see a modest 0.2 percent gain, below the prior month's 0.6 percent increase. Most expect a weak number to add to pressure on the dollar.
US CONSUMER PRICE INDEX FOR OCTOBER: Merits a close watch given signs of rising inflation globally and Bernanke's assertion that the risks to inflation and growth are roughly in balance.
KANSAS CITY FED PRESIDENT THOMAS HOENIG: A voting member of the FOMC, Hoenig will discuss the United States economic outlook and is expected to take questions from the audience in Santa Fe, New Mexico.
TREASURY INTERNATIONAL CAPITAL REPORT FOR SEPTEMBER: Inves4ors will want to see whether foreigners recovered their taste for US assets after dumping them across the board in August. Many fear a weakening dollar is prompting overseas investors to favour non-dollar assets, thus threatening the US ability to fund its current account deficit.
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