The dollar could stay trapped in a tight range versus the euro next week amid a dearth of major US economic data, but German inflation and business sentiment reports could lend a weaker bias, while US bank earnings remain a wild card.
Analysts said shaky equity markets and persistent worries over the health of the US financial sector might see the greenback trend weaker against the Japanese yen after recent sharp gains spurred by a steep decline in crude oil prices. Those concerns could again take center stage when Bank of America Corp releases second-quarter earnings on Monday. This week Wells Fargo, J.P. Morgan Chase & Co and Citigroup surprised investors with results that were less weak than feared.
Analysts expect Bank of America to show a more than 60 percent decline in profits when it reports its results on Monday. Anything stronger, however, may be perceived by some as a sign the banking system remains healthy despite the credit crisis.
"We don't really see too many catalysts for breaking out of the current ranges. What we saw this week was the upside range for euro/dollar bent but not broken. There was a historic high, but barely above the previous high," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
"There is really little on the (economic) calendar to suggest that we're going to cover new ground. I would expect range trading, broadly speaking between 1.57 and 1.59 for euro/dollar next week." The euro climbed to a record peak of $1.6038 on Tuesday, according to Reuters data, and was last quoted around $1.5846.
In the absence of key US data, market attention will focus on Germany's preliminary consumer inflation data for July and the Ifo business sentiment report for clues as to whether the European Central Bank will raise interest rates again. The ECB raised borrowing costs by 25 basis points to 4.25 percent this month, citing rising inflation pressures. On Thursday, ECB Governing Council member Nout Wellink, in a magazine interview, said it was a mistake to believe that inflation would fall if the economy weakens.
"It is an indication that the ECB is by all means open to further tightening, even if that's not currently on the cards," said Serebriakov. "If we do see continued evidence from price and wage data showing upside pressures, this will raise the odds of further tightening by the ECB."
Another ECB rate hike would further widen the interest rate differential between the euro zone and the United States, exerting more pressure on the dollar. The Federal Reserve is not expected to tighten policy before 2009, given the fragile domestic financial market.
US existing homes sales and durable goods orders reports out next week are expected to show further housing market deterioration and sluggish economic growth. Speculation that mortgage finance giants Fannie Mae and Freddie Mac could be inadequately capitalized unleashed the latest wave of crisis in the US financial sector, prompting the Treasury to assemble a rescue plan.
An ensuing two-day rally in US stocks, also as oil prices fell sharply, boosted the dollar against the yen. But analysts reckon the corporate earnings season and lingering worries about mortgage finance titans Fannie Mae and Freddie Mac could see stocks struggle and ultimately cause the dollar to reverse course versus the Japanese currency next week.
The dollar last traded around 106.70 yen, having risen just above 107 yen on Thursday. "We had a bounce in equity markets late this week, but there is little so far to suggest that those are not corrective moves. In as far as some of those moves will be reversed next week, we may see dollar/yen not sustaining those gains," said Wells Fargo's Serebriakov. "I would be cautious about seeing further gains in dollar/yen in the short-term." Other major companies releasing results next week include Merck & Co, McDonald's Corp, Boeing and CCaterpillar Inc.