The dollar enters the coming week on a buoyant note, propelled by a steady influx of safe-haven bids amid persistent stress in the US banking sector and prospects of deepening economic recessions around the world. Barack Obama will be inaugurated on Tuesday as the 44th US President and is the main feature in a week that is fairly thin on US data.
Currency investors will focus on his speech, specifically his plans for the first 100 days in office. Given the market's optimism about Obama's stimulus package, some market participants believe the dollar could get a positive knee-jerk reaction from his inaugural remarks. Still analysts did not rule out a modest pullback in the greenback after three straight weeks of gains against the euro. They said a possible turn lower in the dollar would be technical in nature and not dictated by fundamental news.
"We do maintain an overall bullish view on the dollar, although I wouldn't be surprised to see a corrective pullback because the dollar has strengthened in the last few weeks," said Vassili Serebriakov, senior currency strategist, at Wells Fargo in New York. "But this would be all dictated by positioning and technical factors because the dollar has been immune to negative news and has even gained."
The dollar has risen 1.8 percent this week against the euro and more than 5 percent this year. The euro has struggled, as evidence mounted that recession in the 16-member euro zone could be a deep one. For instance, data showed this week that Germany, the euro zone's largest economy, grew at its slowest pace in three years in 2008.
Germany had contracted between 1.5 percent and 2.0 percent in the final three months of the year, the largest fall since German reunification in 1990. Further depressing the euro was a downgrade of Greece's sovereign debt rating by Standard and Poor's this week. Earlier, S&P said ratings on Spain and Ireland were also under threat.
EURO OUTLOOK, OBAMA: A 50-basis point interest rate cut by the European Central Bank on Thursday pushed the euro lower, although statements by European Central Bank President Jean-Claude Trichet suggesting that the bank will delay its next policy easing until March partly averted a massive sell-off in the euro.
"The failure of the euro to break below the key $1.30 level, despite the ECB cutting interest rates, is significant," Serebriakov said. "That will probably cool off some of the bearish sentiment on the euro." He added that he sees a risk the euro could rise toward $1.35.
There was a slight pick-up in risk appetite on Friday, weighing on the dollar and yen, another currency that benefits from increased market uncertainty because of its funding role in carry trades.
News that Bank of America received a $20 billion government capital injection along with another bank lending package in Britain offset signs of more financial sector fallout from the credit crisis. Many think the positive impact of this news would be short-lived, as more companies may need financial aid. "We do not expect (the return of risk appetite) to be sustained," said Barclays Capital in its latest research note.
"A particular concern is that government capital injections do not address the core problem of (eroding) asset quality on bank balance sheets, which in turn, impedes their ability to lend."
Investors are also looking to Obama's inauguration speech next week, with analysts expecting the new president to present a plan that focuses on measures that would turn the US labour market around and pull the economy out of recession.
Danske Bank in a research note pointed out that a key challenge for Obama is the country's burgeoning budget deficit, which in the long term is a negative factor for the dollar. "Focus may ... shift back to the government deficit and the possible impact of the massive stimulus package that is due in the spring," said Danske.
"While these factors suggest higher long yields, market sentiment (on the dollar) will also be very dependent on how the corporate earnings season and the news flow from the US financial sector unfolds."