FX OUTLOOK-US dollar to remain bid in holiday week

By Wanfeng Zhou

NEW YORK, Nov 21 (Reuters) - The U.S. dollar looks set to maintain its positive momentum in the week ahead as financial market turbulence and global recession fears keep funds flowing back from riskier regions.

Perhaps ironically, even the uncertainty hanging over U.S. corporate icons General Motors (GM.N), Ford (F.N) and Citigroup (C.N) could be catalysts for more dollar strength as investor anxiety about their fate feeds demand for safe-haven U.S. Treasury debt.

"There are several prevailing trends which we expect to persist in the market, including a strong dollar, a strong yen, a decline in equities as well as crude oil prices," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon.

"It's counter-intuitive. But nonetheless, we've become accustomed to the strengthening of the dollar amid the broad-based U.S. weakness and weakness in the global economy," he added.

More broadly, flows in global equities will likely continue to drive trade in the foreign exchange market, analysts said. The dollar has benefited tremendously in recent weeks as falling stocks prompted U.S. investors to bring money home and others to flock to the relative safety of Treasuries.

Reports that New York Federal Reserve Bank President Timothy Geithner has been tapped as U.S. Treasury secretary have eased uncertainty in financial markets. Geithner has been instrumental in putting together a bail-out package for U.S. financial institutions with Treasury Secretary Henry Paulson.

Barring an unexpected setback for the greenback, it appears set to notch its fifth straight monthly advance against most currencies except the yen, the other big beneficiary of safe-haven and repatriation flows. Since June, the U.S. dollar index has risen more than 21 percent.

"It's going to be a repetition of what we've seen over the past few weeks here in terms of the dollar being a proxy for risk in the marketplace," said Matt Esteve, a foreign exchange trader at Tempus Consulting in Washington. "Every time you see the market go down, you see the dollar gain substantially."

In terms of economic data, the calendar in the coming week is heavy and could stoke fears of slowdowns around the world. But analysts said fundamental news is likely to take a back seat to dramatic swings in sentiment in financial markets.

Thin liquidity in a holiday week may also amplify price fluctuations, analysts cautioned. U.S. markets will be closed for the Thanksgiving holiday on Thursday, while trading is expected to be light on Wednesday and Friday.

GLOBAL RECESSION

Worries about a severe global economic slump should cause investors to continue to unwind riskier holdings and park funds in generally safe assets such as U.S. Treasury debt, boosting the greenback, analysts said.

Longer-dated U.S. Treasury yields fell to five-decade lows this week as extreme risk aversion fueled a frantic rush to safety. The monthly capital flows data released earlier this week showed overseas investors were big buyers of U.S. securities in September.

"The yen and the dollar will remain the only two safe-haven currencies in this global recession," said Stephen Jen, global head of currency research at Morgan Stanley in London. "Risky assets will likely remain under pressure, as long as the end of the global recession is not in sight."

The world's leading economies will likely be in recession for around a year, with the UK hit particularly hard, a Reuters poll of around 250 economists across the Group of Seven nations showed this week. See more [ID:nLJ139700].