The US dollar could fall next week, especially against the Swiss franc and Japanese yen, as investors look to a Federal Reserve meeting for hints of further easing as worries about the global economy grow. Stocks sold off and safe-haven assets, like the Swiss franc, soared this week after weak data fuelled fears the world economy is slipping back into a recession. That sentiment persisted even after data Friday showed US job growth accelerated more than expected last month.
Sharp moves in financial markets and the spike in volatility prompted aggressive policy actions by several major central banks in recent days, including a surprise interest rate cut by Switzerland, yen-selling intervention by Japan, and a resumption of bond buying by the European Central Bank.
"With markets already on the defensive and the macroeconomic picture deteriorating, (Fed Chairman Ben) Bernanke cannot afford to be tight-lipped about further quantitative easing," said Ashraf Laidi, CEO of Intermarket Strategy Ltd in London. "They have to continue signalling their readiness to introduce further measures, regardless of the Fed's opinion about the cost-benefit analysis of further quantitative easing," he added.
The US Federal Open Market Committee, the Fed's policy-setting panel, is slated to announce its decision on interest rates at 2:15 pm EDT (1815 GMT) on Tuesday. With no change in rates expected, investors will scrutinise the accompanying statement for the central bank's assessment on the economy and the outlook for monetary policy.
Any hints that the Fed could introduce news measures to stimulate a slowing economy could further erode the dollar's traditional role as a safe haven, driving investors to the Swiss franc and Japanese yen. "Even if the Fed doesn't talk about QE3 next week, the market is going to continue to leave it as a possibility," said David Watt, senior currency strategist at RBC Capital Markets in Toronto. "The only thing can turn the US dollar trend is we start seeing a string of upward surprises in US economic data."