From the September 01, 2010 issue of Futures Magazine • Subscribe!

Forex outlook: Has the euro bottomed?

Dollar daze

The dollar enjoyed a major rebound in the first half of 2010 as it became the currency of last resort. Opinions on where the dollar is headed hinge on views on the direction of the U.S. economy. And in the eyes of the Federal Reserve, that view is getting more pessimistic. Markets headed lower on July 21 after Federal Reserve Chairman Ben Bernanke told Congress that financial conditions "have become less supportive of economic growth in recent months."

Lien says that where the dollar is concerned, the market has shifted its focus from risk to fundamentals. "We’ll probably see additional dollar weakness before strength," she says.

Wilkinson says the dollar’s recent rally has gone too far. "I see risk appetite returning in the second half and that would be detrimental to the dollar," he says.

Some say global economic recovery will be a slower process, and the dollar will therefore strengthen as it retains safe-haven status in the currency world. Cook expects the dollar index to gain heavily based on fears in Europe. "The dollar is going to remain a safe haven. We haven’t had any good data out of the U.S. in a long time, so that’s put some pressure on the dollar. We have fewer [debt] problems, and that will likely help the dollar," he says.

The dollar will end the year stronger because the U.S. economy will continue to weaken, says Joseph Trevisani, chief market analyst at FX Solutions. "Any time systemic risk factors come up, the dollar is still king. The fear background has not abated very much. I would look for a consolidation back and forth, and not a strong trend in either [the euro or the dollar]," he adds.

Dolan agrees. "The dollar’s likely to be relatively well supported because of the weakness in the global economic recovery and there’s going to be that safe-haven appeal," he says, adding that he expects the dollar index to be at 90-92 by yearend.

What’s happening in the U.S. economy will likely have an impact on the yen. "The yen is moving based on U.S. development. U.S. yields have fallen quite significantly. The further these yields fall, the more pressure there will be in dollar/yen," Lien says. She expects the yen to be at 85 by the end of the year.

"If risk appetite returns, the yen [should] weaken to 100 against the dollar. I find it hard to be bullish on the yen," Wilkinson says.

Dolan looks for 85-90 for the rest of the year in dollar-yen and says the upside in dollar-yen is limited by risk aversion. "I can’t rule out intervention [from the Bank of Japan] if we see below 85 in the dollar-yen for any length of time," he says.

Cook agrees. "Economically speaking, I don’t see too much of a shift that could strengthen the yen, but we could be in for some direct intervention where [the Bank of Japan] tries to bring it up to 95 or 98."

(See "Tech Talk: Aussie/Yen at crossroads")

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