Will Dollar Bulls Get Nervous Again?

The US dollar just had its biggest weekly fall against the Euro in a month on decades-low US consumer confidence and record prices of crude oil.

On Friday, crude oil rose to an all-time high of $127.82 a barrel, after Goldman Sachs increased its forecast to an average of $141 a barrel for the second half of this year, up from $107, saying that demand from BRICs (Brazil, Russia, India and China) will overwhelm supply.

The dollar also got an indirect hit when the head of the FDIC (Federal Deposit Insurance Corp) said that “there could be a second wave of the more traditional credit stress you see in an economic slowdown” as credit problems are spreading over to construction and development loans and consumer loans. The FDIC insures deposits at more than 8,000 US banks and maintains the stability and public confidence in the US’s financial system. Negative outlook of the US credit situation and economy could dampen the dollar’s recent bullish sentiment.

More Job Losses Than Reported?

The dollar could also be weighed down by chatter surrounding US payroll numbers. There is talk that the US government may have grossly miscalculated the number of job losses revealed in April non-farm payrolls, because if you were to add up the state payrolls for April, you will end up with 151,000 job losses, versus the 20,000 losses reported in the actual government report. This has led to speculation that April payroll numbers may be revised upward by a big amount. While some economists have rejected this rumor, traders were unwilling to hold so much long dollar positions over the weekend.

ECB Says

ECB governing council member Constancio said that while he sees no risks of a recession in Europe, Eurozone growth will slow in the second half of the year. He also said that “in global terms, inflation is rising”. ECB’s Liebscher said he sees no change in rates this year.

Forex Trading

The US dollar is not broadly weak in the currency market as it turned up against the Swiss franc and Japanese yen over the past week. US Treasury Secretary Henry Paulson repeated Friday that the strong dollar is in the country’s interest and that he expects the solid fundamentals of the US economy to be reflected in the greenback. There is a chance for the dollar to rebound against the Euro next week if USD/CHF can hold above 1.0390-1.0400, but if this support gives way, USD/CHF could target 1.0360, 1.0310.

Sunday:

UK Rightmove house prices 2301 GMT

Monday:

Bank of Japan rate decision (rate expected to stay at 0.5%)

US leading indicators 1400 GMT

Comments

[Will Rahal]

The Dollar will be under attack, but will probably do surprisingly well
since its decline already accounts for the weakness in the US economic structure.
The NBER looks at Retail Sales, Employment, Income and Industrial Production. I posted charts on these series and they are clearly not looking too healthy.
See

wrahal.blogspot.com/20...

[carey_jim]

The value of currencies hasn't always been determined by markets. Also, markets are not always "efficient" as economic textbooks sometimes teach. Markets are just as fallible as the people who make them and are subject to the same greed and fear.

Just as human beings make war with bullets and tanks, they also make war with economic ideas (the Cold War) so don't be completely surprised if politics (economic warfare) trumps the market in the near future.

Or if you must be surprised, be surprised the way citizens of California will be surprised when the "big one" finally hits: Not surprised, just shocked at what they knew was inevitable.

[Coelacanth]

So much bad news has already been priced in to the dollar I would think the economic news going forward would have to be particularly bad to see a lot of dollar weakness again.....which could happen.

It just doesn't feel like we'll see that in the coming week. As such, I'll be looking to buy the dollar on dips.