All eyes on Fed as US dollar halt reaches 7 weeks
London (Apr 27) The dollar steadied in the lower half of an increasingly intransigent range on Monday, after sliding late last week following another round of disappointing U.S. economic data.
The run of poor numbers, attributed mostly to winter weather, has lengthened the latest pause in the currency's rally to almost seven weeks and brought "long" bets on further gains to their lowest since September.
While that is some reflection of a dip in conviction over the scale of any further gains by the greenback, it also means there is more room in trading books for investors to bet on it again.
Of crucial interest this week will be the U.S. Federal Reserve's attitude to the economic numbers.
"The real problem last week was the lack of anything new to go on, which probably left us more exposed to the potential for a correction on the dollar,'' said Ian Stannard, European head of FX strategy at Morgan Stanley in London.
"It may be that the market is looking to get back into dollar longs and I think the extent to which the Fed is prepared to look through this weaker patch of data will be the important element this week.''
The dollar was up 0.4 percent at $1.0831 per euro. The dollar index, which tracks the greenback against a basket of six major rivals, gained about 0.2 percent to 97.15.
Richard Benson, co-head of portfolio investments at institutional currency investment manager Millennium Global, argued that the structural shift toward the dollar over the past year has further to go. But he said it might now be more focused on other currencies than the euro.
"You've had the rally against the yen, the rally against the euro, now the third leg may be focussed on some other currency plays," he said. "Strong conviction calls would be short the Swiss franc and short the Aussie dollar."
He said fair value for the euro was probably around $1.15 but it might fall another 5-10 percent before stabilising.
Helped at the margins by a cut in Japan's credit rating by Fitch Ratings, the dollar also gained 0.3 percent to 119.32 yen , still well below last week's high of 120.10 yen.
The Bank of Japan meets on Thursday, following the Fed's Wednesday statement, and is widely expected to hold policy steady. The policy decision, however, might be influenced by the median inflation forecast produced at the meeting.
While the possibility is slim, BOJ policymakers may opt to ease if the cut to this fiscal year's inflation forecast is unexpectedly big, or if they feel the slowdown in inflation is damaging enough to warrant pre-emptive action.
Source: CNBC
