The US dollar is expected to hold gains next week after recent data suggested that the credit turmoil that has pushed the economy toward recession is spreading to other countries. Data this week showed that the euro zone is beginning to feel the impact of a global slowdown.
That could prompt the European Central Bank to follow the Federal Reserve's lead and begin cutting interest rates, which would dim the euro's appeal against the dollar.
"A lot of the focus in the market is going to turn to the euro zone to see how much of an impact the US financial crisis is going to have on European markets. Now, it seems that we are seeing signs that the euro zone economy could be slowing down," said Boris Schlossberg, senior currency strategist, DailyFX.com in New York.
"Sentiment on the dollar has turned more positive lately. The US jobs report was bad, but it wasn't disastrous," he added. The Labour Department report on Friday that 80,000 US jobs were lost last month fuelled an initial sell-off in the dollar that eventually faded. Analysts said the data was not as dismal as initially feared.
Early on Friday, lower-than-expected German manufacturing orders for February continued the run of weak data in the region, and analysts expect the sector will continue to show tepid growth on slowing global demand. Investors will get a sense on how the European Central Bank views the current US financial crisis and its impact on the euro zone when it holds a monetary policy meeting next Thursday.
Recent data and European comments suggest the ECB will leave rates unchanged at 4.00 percent, but some analysts believe the bank could express worry about the credit crunch's impact on its economy. On the other hand, the Bank of England's Monetary Policy Committee, which also meets next week, is expected to cut rates by 25 basis points to 5.00 percent in an attempt to further stave off a recession. Currency analysts expect the euro to trade between $1.5500 to $1.5850 against the dollar next week, well off record peaks around $1.5905 hit last month.
The dollar's movements against the yen, a barometer of risk aversion in the market, will depend a lot on US equities' performance, analysts say. The currency pair has gained ground over the last week, moving further away from a 12-1/2 year low at 95.77 yen, helped by gains in US equities.
In addition, Federal Reserve Chairman Ben Bernanke "seems to be slowly warming to the idea of moving rates to neutral," he said. Frey expects the Fed to ease further, "but at some point the Fed has to hold interest rates," as the US economy slowly comes out of the credit crisis.
Next week, investors will look out for the release of the Federal Reserve Open Market Committee's minutes of its last meeting on March 18. The Fed last month slashed interest rates by three quarters of a percentage point to 2.25 percent, lopping 300 basis points from its peak at 5.25 percent in September 2007. Analysts say the FOMC minutes will shed light on the Fed's view about inflation and the current US financial crisis.
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