Forex outlook: dollar may fall as US first quarter GDP, FOMC in focus

26 Apr, 2009

The US dollar may fall next week, extending declines from recent sessions, as growing optimism that the worst of the global economic downturn is over dampens the currency's safe-haven allure.
Expectations that the US economic downturn is moderating may get a further lift on Wednesday when investors review the advance reading of first-quarter gross domestic product, which is expected to show the pace of contraction slowed to 5 percent from 6.3 percent in the fourth quarter.
"I think what's really going to probably grab the most attention will be the first look at Q1 GDP," said Joe Manimbo, a currency trader at Ruesch International in Washington. "We could see the dollar perhaps react negatively if we see a more encouraging result, which of course would boost risk appetite and reduce demand for safe-haven currencies."
A policy meeting of the Federal Reserve should also grab some attention, and traders will likely focus on the accompanying statement for clues to the Fed's assessment of the economy. In March, the Fed announced it would buy longer-term US government debt, sending the dollar sharply lower.
"(Investors) want to know how long this quantitative easing is going to last," said Melvin Harris, market strategist at Advanced Currency Markets in New York. "People want clarity and they want to know what the Fed's expectations are for the global economy."
Demand for the dollar as a safe-haven fell this week after better-than-expected economic data and corporate earnings boosted hopes that the global economic slump may be moderating. New US orders for durable goods, for example, slipped far less than expected in March.
And US Treasury Secretary Timothy Geithner wrote in the Financial Times Friday that "there have been some encouraging signs that the global economic downturn may be slackening." On Friday, the euro last traded 0.9 percent higher at $1.3267, not far off an earlier session high of $1.3301, - its highest in more than a week - after improved German business sentiment raised optimism about the euro zone economic outlook.
The dollar was 1.1 percent lower at 96.99 yen, having earlier hit 96.65 yen, its lowest since the end of March. For the week, the euro rose 1.7 percent against the dollar, while the greenback fell about 2.2 percent versus the yen. Currency investors also will closely monitor any developments about the US bank stress tests.
The top 19 US banks need to hold a "substantial" amount of capital above regulatory requirements to weather a potential worsening of the economic recession, the US Federal Reserve said on Friday. The final results will be announced on May 4.
On the US economic data front, besides first-quarter GDP, investors will review a spate of figures: April consumer confidence on Tuesday, personal income and consumption for March on Thursday and consumer sentiment for April on Friday. Other indicators to be released next week include the S&P/Case-Shiller home price indexes, the Chicago purchasing managers index and the Institute for Supply Management's manufacturing index.
"Forward-looking US data are likely to continue to point to some easing in the pace of economic decline," said currency strategists at Brown Brothers Harriman, in a research note. "The anticipation of a recovery is helping to ease global market tensions, reducing flight to quality trades and playing as a short term negative for the dollar," the researchers wrote.

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