The dollar is likely to fall in the week ahead amid ongoing turmoil in financial markets with speculation mounting the US government may have to take over mortgage companies Freddie Mac and Fannie Mae if their funding problems worsen.
The government offered no hint on Friday of a bailout for Fannie and Freddie, the largest providers of financing for US home loans. The government-sponsored entities are considered critical to supporting the US housing market, which is currently in its worst downturn since the Great Depression.
While a housing glut and problems in the subprime mortgage lending have rattled markets for months, investors fear the systemic risk in the failure of either federally chartered agency given they either own or guarantee around $5 trillion in debt. "The big driver recently has been risk sentiment in the market," said Steven Englander, head of G10 currency strategy at Lehman Brothers. This has "implication for all markets and FX markets are no different."
US Treasury Secretary Henry Paulson said on Friday his department's chief aim is to back the two mortgage giants in their "current form" and offered no hint of an imminent government bailout. The speculation around Fannie and Freddie puts added importance on the semi-annual monetary policy testimony by Federal Reserve Chairman Ben Bernanke before a Senate panel on Tuesday and a House committee on Wednesday.
"I am not sure the dollar will rally given ongoing credit concerns, coupled with rate hike expectations and a slowing economy, do not bode well for the dollar," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "In the short term Bernanke may give the dollar a little boost but it will not help the stock market and it is not going to help the dollar" in the longer term.
For the week, the New York Board of Trade's US dollar index fell 1.1 percent at current prices. The dollar dropped 0.8 percent against the yen while the euro rose 1.4 percent against the dollar at current prices.
DATA AHEAD: The dollar is unlikely to get any support from data scheduled for release next week, which includes two key inflation measures. "The sense we get is those numbers still look pretty weak," said Harrell Smith, head of product strategy at Portware, an foreign exchange electronic trading platform in New York. "The Fed will probably be on hold for some time."
Higher US interest rates will bolster the attractiveness of US dollar-denominated securities and increase demand for the dollars to buy them. Investors will also be looking at US retail sales for June, to be released on Tuesday, for signs of how the consumer is holding up as oil prices touch record highs. Consumer spending accounts for two-thirds of US economic activity. Overall retail sales are seen up 0.5 percent for the month and 1 percent excluding auto sales.
Wednesday's slew of releases include the consumer price index for June with the consensus estimate from a Reuters poll forecasting a rise of 0.7 percent month over month in the headline number and 0.2 percent excluding food and energy.
The government will release the Treasury International Capital data for May on Wednesday. Investors review the report to ensure the US trade deficit is still being financed by the purchase of US securities by foreign investors.
Later that day, investors will be scrutinising the minutes from the Federal Reserve's policy meeting on June 24 and 25 for indications as to when the central bank may begin to tighten interest rates to prevent inflation. Housing starts data for June is the final report of the week anticipated by investors with a forecast reading of 0.96 million for the month.