Forex Focus  |  JUL 2007

Forex Focus by Darrell Jobman

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%.

by Darrell Jobman