The US dollar ended a volatile year on Friday a bit firmer than where it began with investors gearing up for gains in early 2011 on expectations the US economic recovery was gaining momentum. The euro, which had its worst year against the dollar since 2005, is likely to stay under pressure as the market focuses on Portugal, Spain and other euro zone countries struggling to address debt and banking problems.
The United States will release December employment data next Friday. Economists polled by Reuters expect to see a private sector jobs gain of 140,000 and a decline in the jobless rate to 9.7 percent. Expectations of above-forecast jobs growth have grown after data this week showed the four-week average of new jobless claims - a measure of underlying labour market trends - fell to its lowest level since July 2008.
"The numbers coming out of the United States over the last two months have been on the stronger side and that is probably going to continue next week," said Paresh Upadhyaya, head of Americas G10 FX Strategy at BofA Merrill Lynch Global Research in New York.
"That will continue to put upward pressure on yields and therefore the dollar will remain on the stronger side" against the eurro, yen and sterling, he said Higher US yields in 2011 and Japan's increased reliance on debt will boost the dollar - particularly against the yen - said Boris Schlossberg, research director at GFT in New York.
The yen neared 80 per dollar earlier this year, just shy of a post-World War Two high of 79.75 set in 1995, as long-term US interest rates fell and markets feared a sluggish US recovery was running out of steam. A key risk for the dollar next week, strategists at BNP Paribas said, could come from Federal Reserve Chairman Ben Bernanke's testimony to the Senate budget panel on Friday.
"The greater risk is that he reinforces (the Fed's) commitment to keep rates low and any hint that further quantitative easing beyond the $600 billion may be an option will see the US dollar weaker," they wrote to clients. For the year, the dollar was up 1.5 percent against a basket of six currencies, but it fell about 13 percent against the yen.
The Australian dollar, which hit a 28-year high of $1.0257 on Friday and was up 14 percent against the greenback this year, may extend gains if global growth remains firm and commodity prices high. But a slowdown in China is a risk, and some analysts said the Aussie's 2010 gains may make it ripe for a correction next year.
THE EURO'S STRUGGLES The euro finished the year down 6.7 percent against the dollar, its biggest annual slide since 2005, hurt by a debt crisis that engulfed Greece and Ireland, rattled Portugal and Spain and even sowed doubts about the euro's future.
But the euro recouped some losses in December and climbed above $1.34 on Friday, extending a recovery from a 2010 low beneath $1.19 - its worst showing since early 2006. Traders tied much of the euro's rebound in December to thin volume and year-end positioning, with investors taking profits on extended bets against the currency that have built up over recent months as fears of a euro zone debt crisis grew.
The euro may remain under pressure early in 2011 as an estimated 150 billion to 200 billion euros in euro zone sovereign bonds come to market, and some investors worry demand may be weak. "Everybody it seems is anticipating a very rocky road for the euro zone over the next three months," said Gareth Berry, G10 FX strategist for UBS in Singapore.
FRANC TO COME BACK TO EARTH? The dollar set a record low of 0.9301 Swiss franc on Friday. The euro/franc pair hit a record low on Thursday at 1.2398 francs and lost 16 percent this year. Concerns about the euro zone debt crisis and more muted worries about Washington's finances have enhanced the safe-haven allure of the Swiss currency.
Despite signs of stronger US growth, the Federal Reserve has given no indication that it plans to curtail a $600 billion bond-buying program it started last month. Analysts also fear an Obama administration deal to extend US tax cuts could swell the budget deficit.
While Schlossberg extolled Switzerland's fiscal health and called the franc "arguably the only sound money left" among major currencies, he said recent gains were excessive. "It's just not sustainable that a country of 7 million can absorb the capital flows they've been absorbing," he said.
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