Dollar may gain if key risk barometers do not improve

Dubai: The US dollar finished the week considerably higher against all counterparts except the euro and Japanese yen, fuelled by a decline in the S&P 500 and broader financial market risk aversion.

The appreciating dollar is increasing deflation pressures in the US and dollar linked Chinese economies. An appreciating currency increases deflationary pressures and is worrisome in an economy struggling with high debt and leverage levels.

In 2008, the Federal Reserve ignored the rising dollar demand, letting it appreciate, which eventually led to the collapse in stock and commodity markets.

There were some significant data releases coming out of the US last week. The dominating theme was risk aversion caused by growing concerns regarding global growth, the European debt situation, and financial regulation responses.

Looking ahead to the coming week, data being released includes the Conference Board consumer confidence results, durable goods orders data, and revisions to US gross GDP figures. Positive surprises in the results could arguably improve the fundamental outlook for the US economy and calm financial market nerves. In the absence of a substantial improvement in key risk barometers, the US dollar may continue to gain against the highly risk sensitive commodity currency bloc and other key counterparts.

Euro

It has been a rough few weeks for the euro, with the aid package drawn up by heads of government and state in the beginning of May only succeeded in stabilising the single currency briefly. When evaluating the euro, the first concern must be the rate of infection and symptoms of the Greek-borne financial crisis.

At some point over the past month, fears that Greece could default and other European Union members were close behind evolved from being the source of the broader market's fears, to the object of uncertainty.

Risk aversion eventually built up so much momentum, that it was self sustaining. So far they have not particularly been successful.

There is increasing uncertainty about the future regulatory environment in the wake of Germany's ban on naked short-selling, and legislation currently being prepared in the US and EU.

This week, focus on European economic data will be intense as the markets look for signs of broader economic impact from the sovereign debt crisis sweeping the European Union. Euro zone industrial orders have been picking up of late and the consensus is for a 2.5 percent increase. Germany's consumer price index is also expected to rise 0.1 per cent for May, pushing the year-over-year rate of consumer inflation in Germany to 1.2 per cent, from 1.0 per cent in April. April consumer inflation unexpectedly decelerated, though the trend is higher as cost pressures increase and the euro declines.

Range for previous week: $1.2142-$1.2672 (Dh4.4597- Dh4.6544). Range for this week: $1.2100-$1.2700 (Dh4.4443-Dh4.6647).

Sterling

Sterling maintained a narrow range after bouncing back from a fresh yearly low of 1.4239 on Wednesday, and the currency may continue to trend sideways over the flowing week as investors weigh the outlook for future growth. The preliminary First quarter GDP report is expected to show economic activity expanded 0.3 per cent from the fourth quarter amid an initial projection for a 0.2 per cent rise. An upward revision in the growth rate may give the Bank of England score to normalise policy further over the coming months as recovery gathers pace.

A report released last week by the Bank of England showed mortgage lending by the major banks in the UK, slipped to the lowest level in nearly a year, with the central bank stating "estate agent contacts reported that the availability of mortgage finance had continued to suppress demand for houses among first tie buyers," and that the central bank is likely to keep a loose policy stance going into the second half of the year.

The pound could benefit from the economic events due to be released this week.

Market participants expect an upward revision of first quarter GDP paired with a rise in mortgage lending. Risk trends will however play a greater roll in driving price action as the European debt crisis continues to weigh on investor sentiment.

Range for previous week: $1.4230 - $1.4546 (Dh5.2266 -Dh5.3427). Range for this week: 1.4190 - $1.4503. (Dh5.2119-Dh5.3269).

Yen

The Japanese yen gained against most of its counterparts last week, as risk aversion gripped broader markets due to concerns that issues in Europe could weigh on global growth. The Asian currency gave back some of its gains to end the weak as fears began to subside, which could carry over into the upcoming week.

The Bank of Japan raised its outlook for the economy following their monetary policy meeting where they left rates unchanged at 0.10 per cent.

The central bank cited signs of sustained recovery in domestic demand for its improving perspective, but also warned that Europe's debt crisis posed a risk to the global economy.

Policymakers also announced a plan to encourage lending targeted at growth industries and suggested it may be willing to do more to support economic recovery by accepting a broader range of collateral for BOJ operations.

The Japanese economic calendar is full of significant gauges for the economy but none are likely to be significantly market moving. The most important release could be the upcoming consumer price index, as deflation remains the central bank's main concern. Forecasts are for inflation to have decelerated by 1.4 per cent from 1.2 per cent the previous month.

The yen could come under pressure if fundamental releases from the largest economies continue to improve providing evidence that the global recovery is sustaining. Broader strength will ease concerns over the expected weakness in the Euro zone and could see risk appetite re-emerge

Range for previous week: 88.98 yen-92.96 yen (Dh0.039511-Dh0.041278). Range for this week: 88.58 yen-94.66 yen (Dh0.038802 -Dh0.042481)

— HSBC Global Markets Middle East