Assailed by doubts about record US deficits and its future status just months ago, the dollar has since been anointed the best of a bad bunch and is set to extend gains, especially against the euro, in the week ahead. The euro lost 1.5 percent of its value against the dollar this week and was 4.6 percent weaker so far this year, beset by a severe debt crisis in Greece and worries about the finances of other euro zone members, including Portugal and Spain.
Investors have hammered the euro and Greek assets, driving up borrowing costs for Greece's government as it tries to implement an austerity plan to tame its budget deficit. That, coupled with a sluggish Japanese economy and fears that China is trying to slow its own rapid growth have shifted the focus from US public finances and a still fragile labour market.
The White House forecasts the budget deficit will hit a record of 10.6 percent of gross domestic product in 2010. "It's not so much about the dollar right now as it is that all the alternatives have been scarred," said Brown Brothers Harriman strategist Marc Chandler. "It's like an election when people vote not for one candidate but against the other guy."
To that end, Chandler said economic data will be a less important driver of exchange rates in the week ahead, extending a trend seen this week. European credit woes overshadowed US payrolls data on Friday, which showed the economy, lost 20,000 jobs in January but also saw the jobless rate drop from 10 percent to 9.7 percent.
Recent employment data has suggested the pace of US job losses is slowing somewhat, but the health of the labour market remains tentative now that 8.4 million jobs have been lost since the start of the recession in December of 2007.
"I think the market is confused, because this data is neither too hot nor too cold and just doesn't give a strong directional signal," said Boris Schlossberg, director of research at GFT Forex in New York. Investors will keep an eye on initial jobless claims data and the January retail sales report due Thursday and consumer sentiment data on Friday. After struggling for most of 2009, the US economy grew at a 5.7 percent annual rate in the fourth quarter, though there are questions about whether it can sustain that momentum in early 2010.
Analysts say the market will certainly continue to watch the situation in Greece and elsewhere and added that investors will be on alert for any sign of intervention by the Swiss National Bank. The SNB entered the market several times in 2009 to weaken the franc against the euro, but the general malaise surrounding the euro zone in recent weeks has boosted the Swiss currency.
Technical strategists at Citigroup say the short-term outlook for the dollar against the yen calls for choppy trade ahead of an eventual lurch upward for the dollar. The latter will be driven mainly by interest rates spreads, which they say will turn more forcefully in the dollar's favour when markets start betting that the Federal Reserve is getting closer to lifting borrowing costs. The Fed has said it expects to keep rates very low for some time yet, and economists generally expect the US central bank to lift them in the second half of the year.
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