DJ FOREX WEEK AHEAD

Sun Aug 01 18:00:00 EDT 2010

Dollar Could Lose If US Economy Slips More

By Bradley Davis
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Fresh worries over a slowing U.S. economy could give the euro an
additional near-term boost as concerns over the euro zone's sovereign-debt crisis ease further.
Disappointing U.S. data--especially in the housing, labor and consumer sectors--have fanned
fears the U.S. economy could slow appreciably in the second half of the year. Some investors
openly fear a double-dip recession, a possibility most analysts see as unlikely, but one that has
led investors out of the dollar.
Those fears have moved front and center just as concerns about the euro-zone sovereign-debt
crisis have moved to the background, as well-received government debt auctions and Europe's
bank stress tests have fueled positive sentiment, helping the euro and hitting the dollar.
"Everyone's ready for a potential weaker half of the year for the U.S. economy," said Robert
Tull, vice president and managing director of foreign exchange and commodity derivatives at
Fifth Third Bancorp in Cincinnati.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies,
traded at a three-month low Friday. The euro on Thursday moved above $1.31 to its highest
point in nearly 12 weeks, after gaining more than 10% against the dollar since its $1.1876 low on
June 7.
The euro's march higher from sub-$1.19 levels has caused some investors to rethink their anti-
euro positions, with speculative investors cutting their bets against the common currency for the
fourth consecutive week.
Net speculative bets, called shorts, against the euro were at 21,300 with a value of $3.46 billion
in the week ended Tuesday, compared to the previous week's data that showed net shorts of
24,250 with a value of $3.9 billion, according to a Scotia Capital analysis of the weekly
Commitments of Traders report released by the Commodity Futures Trading Commission on
Friday afternoon. Anti-euro bets reached a record high of 113,890 contracts on May 11, which
Scotia analysts called "extreme."
The euro could get another boost from next Friday's release of the U.S. non-farm payrolls report,
which will offer a key indication of the pace of the U.S. recovery. The labor report is expected to
show continued stress in the all-important jobs sector, with employers expected to have shed
60,000 workers in July.
A weak jobs report could send the dollar lower against the euro, with the euro perhaps able to
rally to $1.35 in the near term "not because of anything positive happening" in the euro zone, but
"more due to the backdrop here in the U.S.," said Robert Lynch, currency strategist at HSBC in
New York.
The dollar will continue to slip against the euro as long as U.S. data continue to point to a U.S.
economy that is only slowing--not reverting back to recession, said Aroop Chatterjee, chief
foreign-exchange quantitative strategist at Barclays Capital in New York.
If the U.S. economy lurches back into recession, which Chatterjee didn't forecast, the dollar will
again gain on the euro as investors flood out of higher-yielding assets back into the safe-harbor
dollar.
Friday afternoon, the euro traded at $1.3034 from $1.3090 late Thursday, according to EBS via
CQG. It should trade in the coming week between $1.29 to just over $1.31, analysts said, noting
that thin, summer trading often causes exaggerated movements in currency markets.
The euro could also benefit from more rosy talk on the state of the euro zone's economy from
European Central Bank President Jean-Claude Trichet, who will answer reporters' questions after
the ECB on Thursday announces whether it will increase interest rates, which it is not expected
to do.
The mention of recent better-than-expected euro-zone data would contrast with recent Federal
Reserve officials' statements, which have cast the U.S. economy in a less-rosy light.
"It is still premature to conclude that the Fed will start raising rates after the ECB," said Audrey
Childe-Freeman, senior currency strategist at Brown Brothers Harriman in London. But
considering euro-zone economic data have generally surprised to the upside as of late, while U.S.
data have disappointed, a change in rate-increase expectations could at least be on the radar of
pro-euro investors.
Meanwhile, if data continue to point to a slowing U.S. economy, the dollar should also weaken
against the yen, against which the greenback dropped to an eight-month low on Friday. Late
afternoon, the dollar was at Y86.40 from Y86.96. It should trade between Y85 and Y87 in the
short term.
Market watchers said the yen has also gotten a recent boost as retail currency investors were
forced to cut positions in foreign currencies ahead of the introduction of the new rules reducing
the amount of leverage available for foreign-exchange trading that go into effect on Aug. 1.

Disclaimer
(This article is general financial information, not personalized investment advice, as it does not
consider the unique circumstances affecting an individual reader's decision to buy or sell a
specific security. Dow Jones does not warrant the accuracy, completeness or timeliness of the
information in this article, and any errors will not be made the basis for any claim against Dow
Jones. The author does not invest in the instruments or markets cited in this article.)