By Grainne McCarthy
Dow Jones Newswires
NEW YORK -- After a roller coaster for foreign-exchange markets in recent sessions, dollar trading will seek to regain a firm footing against major counterparts this week.
But with the prospects for a global recovery appearing rosier every day, analysts reckon the greenback remains vulnerable to shifts in capital flows as investors ponder rejiggering overseas investments to capitalize on the rebounding world economy and take advantage of high-yielding currencies elsewhere.
"It's becoming expressly clear to the market that this global manufacturing recovery that most had expected in the second half of this year, is happening quite a bit earlier," said Jim McCormick, currency strategist at Lehman Brothers in Jersey City, N.J.
While the recovery clearly is being led by the U.S., paradoxically it is actually hurting the dollar in the short term, even though many analysts think it bodes well for the currency over the longer term. "I don't think in the context of a global recovery where the U.S. is leading the way that you can expect a dramatic drop in the dollar," said Mr. McCormick. "But it could mean the dollar underperforms going into the recovery." Much of the dollar's strength during the past six months has been predicated on the view that the U.S. would rebound before other parts of the world and more robustly. But since some recent surprisingly strong data has come out of the U.S., the market almost is discounting the recovery and has been selling the dollar. Some observers also see more distressing implications for the dollar in the U.S. decision to bail out domestic steel producers by imposing tariffs of as much as 30% on imported steel. The principle that drove the long period of prosperity was that "the U.S. is open for business. We're not afraid of a strong dollar because we can compete," said Marcel Kasumovitch, economist at Goldman Sachs in New York. With the steel-tariffs decision, however, "that platform gets called into question," he said.
Much of the market focus this week will be on the yen, after the currency soared more than 5% last week and clocked up its biggest single-day gain since October 1998. The dollar managed to recover a bit on Friday, but analysts say many investors still are reluctant to take positions in the currency pair, given the ferocity of last week's selloff. "We would use the analogy that if you've got a broken foot, you don't want to put too much pressure on it, it's very fragile," said Robert Sinche, global head of currency strategy at Citibank in New York. "The question is: do I dare tip my toe back in the market." Having said that, Mr. Sinche noted that the sharp moves had also created buying opportunities. "Dollar-yen and euro-yen just went on sale; when they go on sale you have to buy some," he said. Many analysts think the yen is set to resume its weakening trend, even though it has been garnering support from rallying Japanese equities and signs that some foreign investment banks are becoming a bit more bullish on Japan. On this side of the Atlantic, the main data focus of the week will be February retail-sales figures, to be released Wednesday, and February industrial-production numbers due Friday. Analysts will look to the data for more signs of a robust recovery in the U.S. In late New York trading Friday, the euro was trading at 87.40 cents, down from 88.24 cents Thursday. The dollar was at 128.53 yen, up from 127.11 yen late Thursday in New York, and at 1.6864 Swiss francs, up from 1.6689 francs. Sterling was at $1.4212, down from $1.4284. In the euro zone, the main event will be gross domestic product growth data for the fourth quarter, which will be studied for any signs of an end to the area's economic slump. The euro failed to break sustainably above the 88-cent threshold last week and continues to look vulnerable, analysts say. "Budget issues, the slow pace of reform and a lagging growth cycle compared to the U.S. are likely to weigh on the single currency over the medium term," said Dustin Reid, a currency strategist at UBS Warburg in Stamford, Conn.