NEW YORK (Reuters) - The dollar rallied on Monday on anticipation that U.S. economic data this week will prompt the Federal Reserve to scale back its monetary stimulus program sooner rather than later.
Investors and analysts say the near-term outlook for the dollar hinges on the data, such as Tuesday’s retail sales reading, which most expect to be strong. <ECI/US>
Earlier this year, the debate on when the Fed may act on curtailing stimulus measures pushed the dollar higher but in recent weeks the dollar has lagged as investors cooled to the idea of the Fed acting as soon as next month.
“Traders may have begun positioning for outperformance by the U.S. dollar to start the week,” said Christopher Vecchio, currency analyst at DailyFX in New York. “Certainly, if U.S. economic data picks back up, the QE3 taper trade may come back in full force, as it was active in April, May, and June.”
Economic growth data from the euro zone countries due on Wednesday, which the current Thomson Reuters poll puts at a gain of 0.2 percent quarter-on-quarter, could lead to further gains for the greenback. ECIAUG
“While the ECB (European Central Bank) doesn’t focus on growth ... of course the lower a GDP figure the more likely the markets adjust their expectations for more ECB rate cuts and therefore leading to a possibly weaker euro,” said Tatjana Michel, director of currency analysis at Charles Schwab in San Francisco.
“We will have a quiet August. I don’t think the GDP data will weaken it too much but if there is a slight disappointment maybe it heads towards $1.32 or $1.3150,” she said, adding that she is not too euro bearish at this point in time.
The dollar index, which measures the dollar against a basket of six currencies .DXY, rose 0.3 percent to 81.395, moving away from the seven-week low it touched last week.
The dollar initially weakened against the yen on Monday following disappointing Japanese economic growth figures that prompted investors to trim their exposure to risk, but then rose as investors bought on the dips.
The data showed Japan’s economy grew by an annualized 2.6 percent in the period from April to June, a third straight quarter of expansion but slower than expected.
The dollar bounced back after running into bids near 96.00 yen as buyers emerged at lower levels. The U.S. currency was last up 0.6 percent at 96.80 yen, pulling away from a seven-week low set last Thursday. An option expiration was reported at 96.00 yen.
Analysts added the yen, which usually attracts buyers in times of market stress, could gain if Japanese stocks continue to fall on poor economic data.
But some strategists warned the data could weigh on the yen if it persuades the Bank of Japan to loosen policy.
“If data is disappointing in Japan then there is more room for policy response by the BOJ and that would be yen negative,” said Chris Walker, FX strategist at Barclays Capital in London, adding that Barclays forecasts the dollar at 98 yen in one month.
The euro was down 0.29 percent to $1.3303. Support was cited around $1.3269, the 61.8 percent Fibonacci retracement of the July 2-8 uptrend.
The euro zone single currency was under pressure after German news magazine Der Spiegel reported on Sunday that the Bundesbank was warning that Greece would need more financial assistance by early next year.
Data on Monday showed the Greek economy, which was facing its sixth consecutive year of recession in 2013, had shrunk at an annual pace of 4.6 percent in the second quarter.
“I believe the contagion risk has gone down a lot since the last time Greece was in the news. A lot is already priced into the euro and people are just expecting it to happen, therefore I’m not seeing it have a great affect on the euro right now,” said Michel of Charles Schwab.
Reporting by Daniel Bases and Nick Olivari; Editing by Peter Galloway and James Dalgleish