From the September 01, 2011 issue of Futures Magazine • Subscribe!

Forex outlook: The ugly contest

Markets

Federal Reserve Chairman Ben Bernanke’s outlook of the U.S. economy as remaining "unusually uncertain" has gained a whole new level of meaning. Since then, the world saw political gridlock in the United States that nearly resulted in unprecedented default, a continued slowdown in economic numbers that has left some analysts wondering if this is more than just a "soft patch" and the loss of the United States’ AAA credit rating from S&P.

In Europe, sovereign debt concerns still dominate analysts’ outlooks, with some saying the second bailout package approved for Greece merely kicked the can down the road. With such uncertainty in both the dollar and the euro, markets continue to vote with their feet by seeking safe havens such as the Swiss franc and Japanese yen or by bolstering commodity currencies such as the Australian and Canadian dollars.

The U.S. Dollar Index began the year at 79.31 and quickly posted its high for the year the next week at 81.63. It then quickly gave ground and settled into a trading range of 73 to 77 for most of May through August. As the dollar has dropped, so too have the growth expectations for the United States, with the Bureau of Economic Analysis recently decreasing first quarter real GDP growth to just 0.4%.

"The outlook for the U.S. dollar is not promising at all right now. Even though the debt ceiling was raised, there’s still the issue of slow economic growth. That’s been the behind the scenes story," says Kathy Lien, director of currency research at GFT.

She goes on to say that much of the current federal deficit problems are an extension of the 2008 sub-prime credit crisis. "The problems in the financial crisis led to the federal deficit problems because if the economy was booming, there would be enough tax receipts to cover our bills," she says.

Lien says that with the recent downgrade in U.S. debt by Standard & Poor’s to AA+, the U.S. Dollar Index could get down to 70 and says that may hold only because it is a psychological level. She puts medium-term resistance at 75 to 77.50, but expects the index to finish the year on the higher end because she says the U.S. economy will have settled by then.

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