The dollar's rally against most major currencies should extend into next week against as some investors repatriate funds and others hunt for safe havens and shun risky assets amid the worldwide economic downturn. A similar outlook holds for the yen, pegged by many analysts to be the only currency set to outperform the dollar in the near term.
Of particular interest is this weekend's meeting of Group of 20 leaders in Washington. Investors will be watching for any measures aimed at calming anxious financial markets, but few are expecting concrete proposals that could detract from the dollar's allure.
"The dollar remains in a pronounced uptrend," said Andrew Bekoff Chief Investment Office LPB Capital LLC in Doylestown, Pennsylvania. "The financial deleveraging and the breaking apart of the yen carry trade will contribute to pressure emerging market economies and their currencies and support a strong dollar against most currencies except the yen.
With the benchmark interest rate in Japan already close to zero, investors had been borrowing in the Japanese currency then selling it to buy higher yielding but riskier assets elsewhere.
Now with risk aversion a key theme as banks around the world attempt to recapitalize and get bad loans or mortgage-backed securities off their books, investors are unwinding carry trades and buying back the yen. The more extreme risk aversion is, the greater the yen's attractiveness. For the week, the euro fell 0.5 percent against the dollar, while the dollar fell 2.4 percent against the yen. Sterling fell more than 6 percent against the dollar.
Sterling tumbled to a six-year low against the dollar and a record trough against the euro this week after the Bank of England warned the economy will shrink sharply next year and its governor, Mervyn King, bolstered expectations of further aggressive interest rate cuts. The Bank of England cut its benchmark rate by an unexpected 150 basis points just a week ago.
G20: The G20 countries have already agreed on the need for co-ordinated action to fight the financial crisis but left decisions on how to proceed until the meeting this weekend.
The Bush administration said on Wednesday the meeting was timely while British officials in Washington said it might help restore confidence by showing key developed and emerging market countries were working together. While most investors hope the meeting will produce positive results, expectations remain low, which could give the meeting greater currency impact if there is a key announcement.
"Given that everyone expects nothing meaningful to come out of the G20 meeting, the greater risk lies in a surprise," said Kathy Lien, director of currency research at GFT Forex. "If the world leaders agree to any new measures to tackle the economic crisis, it could help US equities recover, which would force the US dollar and Japanese yen to give up some gains."
Other investors cautioned that the dollar's strength could be temporary if investors focus on the cost of the US government's financial sector bailout. The bailout tally is currently at $700 billion for the Troubled Assets Relief Programme with more cash committed in the bailouts of government sponsored entities, insurance company American International Group Inc, and investment bank Bear Stearns.
"The dollar is a temporary haven on uncertainty but not when we realise at the end of the day that we doubled (US) debt," said Craig Russell, Beijing-based chief market strategist Asia/Pacific for Saxo Bank. US data for the upcoming week may produce some volatility but is not expected to have a lasting impact.
US industrial output for October, which is forecast to rise 0.2 percent with capacity utilisation at 76.4 percent, is set for release on Monday. The producer price index for October and Treasury International Capital Flows data for September will be released on Tuesday. PPI is expected to fall 2 percent on the headline number and rise 0.1 percent excluding food and energy.
The October consumer price index is set for release on Wednesday with a decline of 0.8 percent forecast on the headline number and rise 0.1 percent excluding food and energy. A report on housing starts for October, which are expected to rise 780,000 on an annualised basis, is also due on Wednesday, as are the minutes from the Federal Reserve's October policy setting meeting.
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