The dollar is likely to weaken further next week, cementing a trend that has been in place this month, amid increasing risk appetite and expectations US interest rates will remain low for some time. A generally light US economic calendar in the upcoming week should also encourage investors to maintain the market's overall bias, analysts said.
"The momentum is still quite strong for dollar weakness," said Vassili Serebriakov, currency strategist, at Wells Fargo in New York. "At this point, what would probably change the dollar's direction would be a different tone from the Federal Reserve, but that's not coming in the near term."
The minutes of the Fed's latest monetary policy meeting released last Wednesday showed policy-makers discussed whether they should boost asset buying if the outlook worsened. Fed officials also believed economic conditions were likely to warrant exceptionally low rates for an extended period, according to the minutes, spurring further dollar selling.
The dollar, however, recovered on Friday, rising 0.4 percent versus the euro, but it was still down nearly one percent on the week and 1.7 percent lower this month. The US currency got a break from weak third-quarter results from General Electric and Bank of America, boosting the dollar's safe-haven allure. But that about wraps up the bulk of the key reporting US companies for the week and overall, analysts say earnings news have been favourable.
So traders were not overly concerned with the pullback in the S&P 500 on Friday, although it does suggest euro/dollar will face some short-term resistance in the $1.4960-70 area. The euro has become a proxy for risk appetite in the currency market, with investors buying the single euro zone unit as equities rise.
Friday's weaker-than-expected US consumer sentiment report also underscored the euro's vulnerability. TD Securities chief currency strategist Shaun Osborne said the euro could drift back to the $1.4840-50 area, but added that level would serve as strong support for the currency pair.
WEAK NEAR-TERM BIAS "We fully expect the weaker dollar bias to persist in the near-term given the still-decent level of risk appetite and disadvantaged US yields," said HSBC in a research note. "That may not translate into further euro/dollar gains - the approaching weekend as well as the...downtick in US stocks...have helped the dollar - but should do so in the coming week.
While the weak dollar trend remains intact, National Economic Council Director Lawrence Summers repeated on Thursday the Obama administration's rhetoric about a strong dollar being in the US interest. Few analysts are convinced though.
Analysts also say that next week's batch of US data is not expected to alter the market's negative view on the dollar. US housing reports feature prominently in the week's calendar. The overriding view is that the US housing market has bottomed with some incipient signs of demand. Analysts have forecasted an increase in both September US housing starts and existing home sales, which could pressure the dollar even more.
Traders are also awaiting the outcome of a Bank of Canada interest rate meeting next Tuesday, with analysts expecting the central bank to hold interest rates steady at 0.25 percent. But analysts would be monitoring comments on Canadian dollar strength, which has hurt the economy's exports. The Canadian dollar has surged 17 percent so far in 2009, with traders eyeing a drop in the US dollar to C$1.
In other currencies, more and more analysts are getting bearish on the yen. The yen has gained about 2.5 percent against the dollar the last two months even though risk appetite has improved.
At the peak of the financial crisis in 2008 and the first quarter of 2009, investors had bought the yen and dollar as a refuge from the credit storm. Now that the crisis has eased, investors have been selling the dollar, but have held off in unloading their yen positions.
Analysts attributed the yen's strength to the perceived shift in Japan's currency policy. Official rhetoric suggests the new Japanese government does not share the previous regime's aversion to yen strength and it looks less likely that it would intervene to counteract market movements.
However, this view from the Japanese government is beginning to have less of an impact on dollar/yen, said Todd Elmer, senior currency strategist at CitiFX in New York. "The erosion of support from official rhetoric on the exchange rate should leave the yen more vulnerable to negative underlying fundamentals and a potential acceleration in capital outflows," said Elmer.
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