After a brutal sell-off in May, the dollar looks vulnerable with the start of June as recovery hopes and lingering worries about the growing US deficit prompt investors to move away from the greenback. The dollar fell to a five-month low on Friday and was on track for a monthly drop of more than 6 percent versus a basket of currencies, its biggest decline since 1985.
A full slate of US economic data next week, which will be highlighted by Friday's jobs report for May, is expected to reinforce market views that the worst of the global downturn may be past, analysts said. "The tide is turning and we are beginning to see more signs of stability in the US and global economy," said Kathy Lien, director of currency research at GFT Forex in New York.
"We're probably looking forward to more positive data from the US economy, which will ease safe-haven flows and continue to drive the dollar lower." Signs of improvement in the global economy have dried up safe-haven flows into the greenback in recent weeks, stalling a rally that lifted it nearly 6 percent against major currencies in 2008. Lien expects the dollar to fall to $1.43 against the euro and $1.6350 against the British pound next week.
On Friday, the euro struck its highest level this year against the dollar at $1.4168, according to Reuters data, and was heading for its largest monthly gain since December of more than 7 percent. The dollar also fell sharply against the British pound this month, which surged nearly 10 percent, the best monthly performance since 1985.
Against the yen, the dollar lost about 3 percent in May, the biggest since last December. Beyond the near term, the longer-term backdrop for the greenback also looks fairly bleak, many strategists said.
Concerns about the soaring US deficit came to the forefront after a downgrade of UK's credit outlook last week sparked fears the United States may face a similar fate. The issue took on added urgency this week when long-term Treasury yields spiked.
Strategists say the Federal Reserve, which began buying $300 billion in long-dated Treasury bonds in March may have to increase its efforts to push yields back down. "That dynamic is what undermines the dollar from a medium term perspective," said Paresh Upadhyaya, a portfolio manager at Putnam Investments in Boston. "The trend is quite clear. As the Fed moved down the path of quantitative easing and in an aggressive manner, the dollar has languished."
CENTRAL BANKS: A slew of central bank meetings in the euro zone, Britain and Canada will also grab the market's attention next week. Investors will focus on whether the European Central Bank will expand its use of non-conventional tools to stem the euro zone's economic decline. Last month, the ECB said it would buy 60 billion euros covered bank bonds.
A Reuters poll found analysts were split over whether the ECB would extend the plan past 60 billion, given conflicting comments from policymakers. "Any expansion of quantitative easing would be euro negative because that would just mean that they're more willing to use the printing press to support the economy," said Jacob Oubina, currency strategist at Forex.com in Bedminster, New Jersey.
The coming week includes a wide range of economic indicators: US personal income and spending and the Institute for Supply Management's manufacturing and non-manufacturing indexes. For the non-farm payrolls report due on Friday, economists polled by Reuters are looking for job losses of 517,000 for May, while the unemployment rate is expected to rise to 9.2 percent from 8.9 percent.