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Dollar To Drift Until Next FOMC Meeting

Friday, January 18, 2008

FOREX VIEW: Dollar To Drift Until Next FOMC Meeting

By Riva Froymovich

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Currency investors will be lame ducks next week, limiting the movement of the dollar against its major rivals.

Markets are waiting for many things: clarity on the impact of a U.S. government economic stimulus package; the meeting of the rate-setting Federal Open Market Committee at the end of the month; the Organization of Petroleum Exporting Countries meeting; and interest rate decisions from central banks abroad.

Moreover, U.S. government offices, banks and financial markets are closed Monday for a national holiday in observance of Martin Luther King Jr. Day.

The upshot may be a more confident dollar, said analysts, albeit tenuously. But until then, the buck is unlikely to break any significant technical barriers, moored by weak economic data and risk aversion.

"Concerns about a global slowdown are encouraging risk aversion and prompting demand for undervalued assets and selling of overvalued assets," said Brown Brother Harriman analysts.

The Canadian dollar against the dollar, one of 2007's strongest currencies, is now underfoot. Rising stars, though, might include the U.K. pound. It has been under intense pressure since the close of 2007, dropping to its lowest level since the introduction of the euro, and yet it has enjoyed a resurgence recently. The euro has been named among the overvalued.

The risk for broad dollar declines has eased as well. Analysts say much of the downside risks are already priced into the market. Broadly, that is helping the case for currencies that have recently suffered most.

The euro is expected to trade between $1.46 and $1.48 next week.

"The euro-zone economy is slowing and while (European Central Bank President Jean-Claude) Trichet continues to talk tough ahead of wage rounds, it is highly unlikely the ECB will raise rates. We expect a cut in coming months," said the Brown Brothers Harriman analysts.

Another indicator of coming euro weakness is that Asian exports appear to be weakening via-a-vis the Baltic dry index, a gauge of global demand that has dropped since November, even as commodity prices have climbed, noted James McCormick, head of global currency strategy at Lehman Brothers in London.

Against the yen, the buck will be range-bound next week, near Y107, tied to the movement of U.S. equities and investor sentiment on the U.S. economy.

The big mover will be more comments from the U.S. administration on its economic stimulus package, said Robert Fullem, vice president of corporate currency sales in New York at Bank of Tokyo-Mitsubishi UFJ Ltd.

Earlier Friday, President George W. Bush called for tax incentives for businesses and "direct and rapid" tax relief for individuals, saying a stimulus package should be passed as soon as possible to shield the U.S. economy from a steep downturn.

To be effective, Bush said the stimulus must be temporary and take affect right away. He said the size of the package should be around 1% of U.S. gross domestic product, which would be around $130 billion to $150 billion.

Late Friday morning in New York, the euro was at $1.4618 from $1.4659 late Thursday. The dollar was at Y106.80 from Y106.73. The euro was at Y156.15 from Y156.51, according to EBS. The U.K. pound was at $1.9521 from $1.9704, and the dollar was quoted at CHF1.1011 from CHF1.1001 late Thursday.

While the dollar will likely be hurt by the expected trimming in the Fed's benchmark rate at the Jan. 29-30 FOMC meeting, a strong stimulus package would lift risk sentiment and the buck, said Fullem. However, "there is not a lot of confidence right now that the implementation is going to be immediate, which is concerning the markets."

Oil is another factor weighing on the dollar.

OPEC is meeting on Feb. 1. Bush said Wednesday that after talks with Saudi King Abdullah, OPEC will increase oil production to ease the upward pressure on prices.

"Oil at this price, combined with other things going on in the U.S., is having a really negative impact on the U.S. economy...and the dollar," said Fullem. "The tax cuts may be a temporary relief, but you still have oil at $90 per barrel."

"If in fact there is a focus on pushing the price of oil down, I think it'll help the dollar out..whether its supply or just rhetoric or letting their currencies appreciate relative to the dollar," said Fullem.

On Tuesday, the Bank of Canada and Bank of Japan announce interest rate decisions. The BOC is expected to ease mildly, while the BOJ isn't seen moving its interest rates despite signals that the economy is faltering.

The Bank of England will publish the minutes of its last monetary policy meeting on Wednesday. U.S. existing home sales and weekly jobless claims data will be released Thursday.

Posted by MOHAMED SAID at 9:29 AM  

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