Investors are likely to resume selling the dollar next week, reinforcing a trend that has been in place since October on the view that US interest rates will remain low even as global economic health improves. US economic data will likely play a starring role in driving the dollar's direction, analyst say, with an October retail sales report kicking things off on Monday.
"Next week's data would determine whether this dollar downtrend will continue, and retail sales is crucial," said Kathy Lien, FX research director at GFT in New York. Markets expect US retail sales to have risen 0.9 percent in October, while sales excluding autos are seen increasing 0.4 percent. That should keep the dollar carry trade story alive, which means further weakness in the greenback, Lien said.
With near-zero US rates making money readily available and cheap, investors this year have borrowed huge sums of money in dollars to purchase higher-yielding assets overseas in carry trades to achieve better returns. Signs of strength - in the United States or beyond - encourage more of that behaviour, since the Federal Reserve has hinted it intends to keep rates low well into 2010.
While the US economy grew in the third quarter of 2009 for the first time in more than a year, employers are still cutting jobs, driving the jobless rate above 10 percent for the first time in 26 years.
The dollar got a bit of a respite this week, edging up against the euro. But the euro was up more than 4 percent in the third quarter and has climbed 6.2 percent so far in 2009. Other data, including US consumer and producer price reports, are likely to show inflation is benign, which should dispel any lingering notions of a near-term US rate hike. Analysts are also forecasting an increase in both October US housing starts and a key index on homebuilder sentiment, which could add to pressure on the dollar.
OBAMA TO CHINA Aside from the data, investors will also focus on US President Barack Obama's visit to China. Market participants expect currencies to be discussed. Most analysts, however, do not expect Obama's visit to result in a real shift in China's currency's policy in the near term. But longer term, China may allow its currency to appreciate to counter inflation risks.
"I don't see anything big coming out of Obama's visit to China," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. "The fewer comments Obama makes on the Chinese currency, I think the better it is. The last thing the Chinese need is pressure."
Serebriakov expects the weak dollar trend to remain intact next week and possibly for the rest of the year. Any dollar rally though is an opportunity to sell, he added. Federal Reserve chairman Ben Bernanke is also scheduled to speak next week at the Economic Club of New York.
"His speech on Monday will...be key in determining the path of the dollar into year-end; any hawkish hints will likely lead to dollar strength," wrote Stephen Hull, currency strategist at Morgan Stanley in a note. In other currencies, sterling will remain under pressure, analysts say. The Bank of England minutes are due next week and are expected to emphasise Governor Mervyn King's recent comments suggesting the BoE has left the door open for further quantitative easing.
That's bad news for the pound as it indicates the UK economy continues to struggle and suggests the central bank may continue pumping money into the economy. Sterling has added 1.2 percent this month against the dollar but it was nearly flat on the week.