The US dollar is expected to gain in the week ahead as investors remain focused on the outlook for steady US interest rates while other regions are expected to begin cutting rates. The expectation for stable US rates among currency investors remains in place despite the US unemployment rate jumping to 6.1 percent in August, its highest in more than 4-1/2 years.
US short term interest rate futures after the pointed to the Federal Reserve holding the fed funds rate steady at 2.0 percent at this month's policy setting meeting, even after the US monthly jobs data was reported on Friday.
Investors will now closely scrutinise inflation, consumer sentiment, and retail sales data set for release in the coming week, for more clues on the health of the US economy and the potential for higher interest rates.
"There have been several interest rate cuts in Asian markets and Australia along with pressure on the ECB and BoE to cut rates, while pressure is mounting for a rate hike in the US, both work in favour of the dollar," said Andrew Bekoff, chief investment strategist at Meyers Associates in New York. Some Fed officials are concerned about inflation, which has been pushed above 5.0 percent by soaring energy and food prices during a time of historically low Fed rates.
Earlier, on Tuesday this week, documents showed that directors of three regional Federal Reserves - Kansas City, Dallas and Chicago - sought a quarter point hike in the discount rate before the Fed's last policy meeting, on August 5. The discount rate is the rate charged banks for direct loans from the Fed.
While changes to the discount rate will not impact consumer rates such as credit cards and mortgages directly, investors will see it as a sign of stability in the financial system and a precursor to change in the more widely-known federal funds rate, the lending rate between banks.
In contrast, the Bank of England left its key rate on hold at 5.0 percent for a fifth month on Thursday amid expectations that recession worries could prompt a cut before the end of the year. Money markets are pricing in three quarter-percentage point cuts in Great Britain by this time next year given the speed of Britain's current economic slowdown.
Australia's central bank cut its key cash rate for the first time in several years this week, by 25 basis points to 7.0 percent. And while the European Central Bank left interest rates unchanged at 4.25 percent on Thursday and President Jean-Claude Trichet said it would not get euro zone inflation back on target until 2010, the ECB also lowered its outlook for economic growth in the euro zone for this year and next.
"Inflation warnings are nothing new from the ECB and its president Jean Claude Trichet, they cannot move the euro higher," said Joseph Trevisani, chief market analyst, FX Solutions in Saddle River, New Jersey. "But growth warnings are new and they can move the euro down."
For the week, the euro fell 3.1 percent against the dollar, while the US currency fell 1.8 percent against the yen. The ICE Futures US dollar index, the dollar against a basket of six major currencies, rose 2.2 percent for the week.
Major US data to be released in the week ahead includes: US wholesale trade on Tuesday, international trade on Thursday. Friday will be the busiest day for data with releases on US producer prices for August, August retail sales, July business inventories and September consumer sentiment.