The Wall Street Journal-20080114-Forex View- Dollar May Zigzag on Data- Fed Scrutiny
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Forex View: Dollar May Zigzag on Data, Fed Scrutiny
Range-bound choppiness is likely to define the dollar this week, with expectations of Federal Reserve interest-rate cuts working against it but risk aversion over shaky stock markets offering some support.
A heavy flow of U.S. data will keep currency investors on their toes, and traders will monitor Thursday's questioning of Fed Chairman Ben Bernanke by Capitol Hill legislators.
The economic data, especially December retail sales due tomorrow, and Mr. Bernanke's comments are likely to cement expectations that the Fed will deliver a rate cut of as much as a half percentage point at the end of this month in an effort to boost growth. Such expectations tend to work against the dollar because lower rates tend to reduce investors' returns on dollar-based assets.
However, the dollar is likely to find support, at least against the euro, from stock markets worried about more problems in the financial sector because of soured mortgage investments.
Such worries prompt risk-averse investors to sell higher-yielding currencies and return to lower-yielding, yet safer, ones. The yen and, to a lesser extent, the dollar stand to benefit from such safety plays.
Even with that support, analysts said the most probable scenario for the dollar is more weakness.
"There are some mitigating factors to dollar weakness" this week, said Jeff Gladstein, global head of foreign exchange at AIG Financial Products Corp. in Wilton, Conn. "But to the extent that Bernanke says the same thing on Capitol Hill that he said [Thursday], the trend remains in place for a lower dollar."
Against that backdrop, analysts said the euro is likely to trade in the coming week between $1.4675 and $1.4950, just shy of its high of $1.4968. Against the Japanese currency, the dollar is likely to drift between 107.50 yen and 110 yen.
