Forex Focus by Darrell Jobman
Can The US Dollar Hang On?
To answer that question, you need to read
this analysis of the greenback.
How many times have people buried the US dollar for
one reason or another, only to see the dollar bounce
back? The dollar is at it again as recent US economic data has
caused some doubts about the strength of the greenback.
However, near-term US growth trends should still offer
short-term dollar protection as expectations of a cut in interest
rates appears likely to fade again.
The US dollar could secure further strong buying support
if traders start to price in an interest rate increase later in 2007,
although such a move carries some risks that the economy
will deteriorate further, with the housing sector still an
important component to consider.
CURRENT ACCOUNT CONCERN
Although the US trade deficit seemed to be stabilizing in the
first quarter of 2007, that was due primarily to a decline in
energy prices. The current account deficit is still running at
unsustainable levels. Therefore, the US currency remains
vulnerable on structural grounds. A key factor is that any US
dollar rallies are likely to attract considerable selling interest
as central banks look to reduce their dollar holdings in favor
of other currencies for their reserve accounts. This selling
will severely curtail the potential for substantial dollar gains.
Confidence in the Eurozone economy should remain firm
in the short term, with particular optimism about Germany’s
status. The European Central Bank (ECB) still has room to
increase interest rates, but expectations over further increases
may be scaled back, given that Eurozone inflation seems to be
contained below 2.0%.