FX OUTLOOK-Sentiment remains tilted toward dollar
May 17, 2008
By Steven C. Johnson
NEW YORK, May 16 (Reuters) - With recent market sentiment in its favor, the dollar looks well-positioned to build on recent gains in the week ahead, particularly if Federal Reserve officials continue to dwell on the risk of higher inflation.
After sinking to an all-time low against the euro late last month, the dollar has rallied against most major currencies in May, and better-than-expected retail sales and housing reports helped counter softer data on manufacturing and consumer sentiment.
"We have been seeing very steady net buying of the dollar across the board for the past several weeks," said Samarjit Shankar, director of global FX strategy at The Bank of New York Mellon in Boston.
"That, to us, is a very telling indicator that the market has turned, and people will be looking for any fresh catalyst to buy the greenback," he said.
Also helping the dollar has been a chorus of Fed officials who have seemed increasingly concerned that rising energy costs would put upward pressure on inflation.
That has suggested to markets that the U.S. central bank may indeed be through with interest rate cuts -- and just when softer euro zone data has suggested that the Eu ropean Central Bank may have all its rate-cutting ahead of it.Fed governors Donald Kohn, Kevin Warsh and and Randall Kroszner are all slated to give speeches next week and currency market participants will keep a close watch.
Analysts said the shift in the relative interest rate outlook should continue to favor the dollar over the euro.
"If I were running a trading desk, now would be the time I'd authorize traders to go long the dollar overnight instead of short," said John Browne, senior market advisor at Euro Pacific Capital in Darien, Connecticut.
Whether a dollar rally can be sustained, though, will depend on the Fed, he said, and when it acts to tighten monetary policy.
A thin U.S. economic calendar this week may not provide much indication of future Fed policy this week. The one key indicator will be Tuesday's producer price index for May, which will be watched closely for signs of inflation.
The Fed has cut rates by 3.25 percentage points to 2 percent since September, though its last cut in April came with a subtle suggestion that it may be its last for some time.
Analysts said minutes from its April policy meeting are unlikely to provide much news on the Fed's thinking regarding monetary policy or the economy.
"It's probably a bit too early to say what the Fed does next, but it is becoming more and more likely that they are done cutting rates, barring a major collapse at some big financial firm," said Dustin Reid, senior currency strategist at ABN AMRO. "That's getting priced into the dollar."
The currency market will pay close attention to incoming euro zone data, particularly Tuesday's ZEW survey of German business confidence.
The median estimate of a Reuters survey is for a slight improvement in the indicator, though any sign of deterioration in the euro zone's biggest economy should bolster expectations of more sluggish growth ahead.
(Editing by Richard Satran)
© Thomson Reuters 2008 All rights reserved
NEW YORK, May 16 (Reuters) - With recent market sentiment in its favor, the dollar looks well-positioned to build on recent gains in the week ahead, particularly if Federal Reserve officials continue to dwell on the risk of higher inflation.
After sinking to an all-time low against the euro late last month, the dollar has rallied against most major currencies in May, and better-than-expected retail sales and housing reports helped counter softer data on manufacturing and consumer sentiment.
"We have been seeing very steady net buying of the dollar across the board for the past several weeks," said Samarjit Shankar, director of global FX strategy at The Bank of New York Mellon in Boston.
"That, to us, is a very telling indicator that the market has turned, and people will be looking for any fresh catalyst to buy the greenback," he said.
Also helping the dollar has been a chorus of Fed officials who have seemed increasingly concerned that rising energy costs would put upward pressure on inflation.
That has suggested to markets that the U.S. central bank may indeed be through with interest rate cuts -- and just when softer euro zone data has suggested that the Eu ropean Central Bank may have all its rate-cutting ahead of it.Fed governors Donald Kohn, Kevin Warsh and and Randall Kroszner are all slated to give speeches next week and currency market participants will keep a close watch.
Analysts said the shift in the relative interest rate outlook should continue to favor the dollar over the euro.
"If I were running a trading desk, now would be the time I'd authorize traders to go long the dollar overnight instead of short," said John Browne, senior market advisor at Euro Pacific Capital in Darien, Connecticut.
Whether a dollar rally can be sustained, though, will depend on the Fed, he said, and when it acts to tighten monetary policy.
A thin U.S. economic calendar this week may not provide much indication of future Fed policy this week. The one key indicator will be Tuesday's producer price index for May, which will be watched closely for signs of inflation.
The Fed has cut rates by 3.25 percentage points to 2 percent since September, though its last cut in April came with a subtle suggestion that it may be its last for some time.
Analysts said minutes from its April policy meeting are unlikely to provide much news on the Fed's thinking regarding monetary policy or the economy.
"It's probably a bit too early to say what the Fed does next, but it is becoming more and more likely that they are done cutting rates, barring a major collapse at some big financial firm," said Dustin Reid, senior currency strategist at ABN AMRO. "That's getting priced into the dollar."
The currency market will pay close attention to incoming euro zone data, particularly Tuesday's ZEW survey of German business confidence.
The median estimate of a Reuters survey is for a slight improvement in the indicator, though any sign of deterioration in the euro zone's biggest economy should bolster expectations of more sluggish growth ahead.
(Editing by Richard Satran)
© Thomson Reuters 2008 All rights reserved
