FX OUTLOOK-Dollar decline looks set to resume next week
Fri Jul 27, 2007 1:01PM EDT
NEW YORK, July 27 (Reuters) - The dollar's brief respite may come to an end next week as global investors rediscover
their taste for risk and focus anew on signs of slower growth in the U.S. economy.
Despite hitting a lifetime low against the euro earlier in July, the dollar rallied against most major currencies this week as
worries about global credit conditions prompted investors to cut back on risky trades.
Credit spreads widened, stocks fell sharply and U.S. government bond yields tumbled as investors repatriated funds
from overseas holdings into safer dollar assets.
The low-yielding yen, a popular funding currency for risky trades, was the exception and was on track for a 2 percent
weekly gain against the greenback and a nearly 6 percent weekly rise against the high-yielding New Zealand dollar.
Analysts said that leaves the U.S. currency vulnerable to a sharp reversal of fortune in the week ahead.
"The dollar did not rally on positive economic news. It rallied despite weak home sales data and a lackluster durable
goods report," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.
He said a recovery in risk appetite should push the dollar back below $1.38 per euro, which stands to benefit on the
view that euro-zone interest rates will rise in September.
Meanwhile, he said the dollar and euro should recover losses against the yen, with the former rising back above 120
yen.
On the data front, the focus will be on Tuesday's core index for personal consumption expenditures for June, a closely-
watched inflation gauge.
The year-over-year core index, which removes food and energy costs, showed a 1.9 percent gain in May, the smallest
advance in more than three years.
A similar reading in June would reinforce the Federal Reserve's case that price pressures are ebbing and would be a
further negative for the dollar.
That would "certainly be grounds for removing the Fed's inflation bias, and that's important because it opens the door
for potential rate cuts later this year if needed," Woolfolk said.
Strategists at BNP Paribas pointed out that global liquidity reduction is in its early stage, leaving ample fuel for carry
trades.
Meanwhile, BNP Paribas said the cause of the latest round of risk aversion -- mounting U.S. mortgage delinquencies
and losses on bonds backed by risky mortgage debt -- will renew the negative focus on the dollar, which should suffer
from reduced capital flows into U.S. corporate bonds.
But Morgan Stanley strategists said the scope of market moves this week suggest there could be more risk aversion to
come.
Indeed, the yield on the two-year Treasury note last stood at 4.54 percent, 24 basis points lower on the week and well
below the benchmark federal funds rate of 5.25 percent.
"In the short run, this move likely has further to run as market nerves are unlikely to be quickly placated," Morgan
Stanley strategist Sophia Drossos wrote in a note to clients.
She said that means the yen should continue to rally as investors buy back the currency to cover bets on risky assets,
with a move toward 116 yen per dollar possible.
Japanese parliamentary elections on Sunday are unlikely to have much impact on exchange rates, analyst said, as a
possible poor showing by the ruling Liberal Democratic Party has already been priced in by markets.
* TUESDAY - JUNE U.S. CORE PCE PRICE INDEX: Economists are expecting a small uptick after last month's core index
reflected the smallest gain in more than three years.
* WEDNESDAY - JULY ISM U.S. MANUFACTURING INDEX: The median forecast is for 55.0, a modest decline from
June's 56.0.
* THURSDAY - EUROPEAN CENTRAL BANK POLICY MEETING: Benchmark interest rates are expected to stay on hold
at 4 percent but ECB President Jean-Claude Trichet could flag a rate hike for September.
* THURSDAY - BANK OF ENGLAND POLICY MEETING: Rates seen on hold at 5.75 percent.
* FRIDAY - JULY U.S. NON-FARM PAYROLLS REPORT: Analysts are looking for the fifth consecutive month of job
growth of more than 100,000, at 130,000.
Additional Articles For further study:
"Dollar Gains Against Euro; Yen as US Stock Futures Rebound" Bloomberg 7/25/07
"Asian Stocks Rebound; Led by JFE Holdings" Bloomberg 7/30/07
"Dollar Decline Looks Set to Resume Next Week" FX Outlook 7/27/07
"Inflation in India; How to Tackel it" Rediff 3/21/07
"The Coming Collapse of the US Dollar" Rediff 6/11/07
“Signs of the Times” by Dr. Irwin Kellner
“Fed Chickens Out” by MoneyNews.com editors
“Gold, What's Next” by Mary Anne and Pamela Aden 7/25/07
“Industrial Metals Rise - Gold Also Gains" 7/20/07
“GOLD: Big Picture Focus” by Mary Anne and Pamela Aden
"Oil Rebounds Following Decline of the Dollar" 727/07
"Set to Resume Next Week" by FX Outlook 7/27/07
"The Faultlines in the Economy" by Alan Maas
"U.S. Current-Account Deficit Deserves Some Noise" by John M. Berry
"Why the sudden dollar plunge?" By John Stepek, MoneyWeek
If you have any questions regarding these or any other articles you've read, feel free to contact me by calling me
directly David Hellier at (877) 314-COIN (2646) or email me anytime at dave@superiordiscountcoins.com.