January 15, 2010 / 5:06 PM / 10 years ago

FX OUTLOOK-U.S. dollar likely to benefit from Greek woes

* Greece will remain a drag on euro/dollar

* Uncertainty remains about U.S. economic outlook

* Aussie dollar still a favorite, but due for a pullback

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 15 (Reuters) - The dollar in the coming week is likely to benefit from concerns about the euro arising from Greece’s fiscal problems, but the greenback’s gains are seen limited by uncertainty about the outlook for the U.S. economy.

Greece slid into its first recession in 16 years in 2009 and is poised to become the euro zone’s most indebted member this year, with debt estimated at more than 120 percent of gross domestic product.

Headlines on Greece have caught the market’s attention and spooked the euro this week, with the single euro zone currency down 0.8 percent on Friday. Meanwhile, the spread on Greece’s five-year credit default swaps, a measure of market sentiment on sovereign debt, hit a record high of 340 basis points on Thursday from 327.5 on Wednesday, and 254 on Monday.

Worries about Greece are not going away despite the country’s plans to cut expenditure and hike taxes. Greece is expected to weigh on the euro for some time and push the dollar higher in a holiday-shortened week, analysts said.

“I do not think the market has fully priced in the extent of the problems in Greece including the other troubled countries in the euro zone — Portugal, Ireland, Italy, and Spain,” said Dean Popplewell, chief currency strategist, at OANDA, an FX brokerage firm in Toronto.

“I don’t believe the situation is contained and I think investors will still demand U.S. dollars as some form of safe-haven.”

On the week, the euro EUR= was down 0.5 percent versus the dollar after posting a nearly 1.0 percent gain the previous week.

Analysts said Thursday’s comments from European Central Bank President Jean-Claude Trichet that Greece will not be given special treatment did not help the euro’s cause. Nor did his view about the uneven recovery in the region. Those remarks cemented the view benchmark euro zone interest rates will remain low for some time.

U.S. DATA WILL BE IN FOCUS NEXT WEEK

Aside from the euro zone. U.S. economic reports will also be a key focus next week, analysts said. U.S. financial markets will be closed on Monday for the Martin Luther King Day holiday.

Data on U.S. net capital flows, producer prices, housing starts, and initial jobless claims are all scheduled for release in the coming week and will be watched closely for clues as where this economy is heading.

Recent U.S. numbers have been mixed at best and some investors are having doubts about the pace and strength of this U.S. recovery.

“The markets will possibly be nervous with U.S. data that’s not favorable. If those numbers come in bearish, then that would further discount the dollar,” said Tim Evans, market strategist, at Lind-Waldock, a futures brokerage firm in Chicago.

“The jury is still out about the U.S. economy. People are concerned that the optimism we saw with good U.S. numbers may be waning a bit, that this recovery may be slowing.”

To some degree, Evans said this has diminished the attractiveness of the U.S. dollar and the reason it has held up well so far is because other currencies such as the euro and sterling are having their own problems with respect to their economies.

Technically, Evans said the ICE Futures’ dollar index has breached key levels.

“That 77 level is pretty critical, but we’ve been through that area to the downside the last couple of days. That support is trying to hold but there’s not a a lot of conviction,” Evans said.

“If we’re not able to hold 77, I would look for further downside here, possibly going back to 74.50-75.0.

On Friday, the dollar index .DXY was up 0.7 percent at 77.232. On the week, it was little changed, after losses of 0.8 percent the previous week.

In other currencies, investors remain short-term bullish on the Australian dollar especially in the wake of another strong jobs report in Australia. But analysts warned that the Aussie currency may be due for a pullback given its steep gains.

Westpac Securities said it will look to buy back the currency on dips to US$0.91. On Friday, the Australian dollar was down 0.9 percent against the U.S. dollar at US$0.9232 and on the week was down 0.1 percent after gains of more than 3.0 percent the previous week.

Editing by Andrew Hay

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