Week that Can Define Future of Dollar

This week promises to be very important for the US dollar as there will be many fundamental reports, including the very important non-farm payrolls. Will they confirm the tendency of the US economy to improve, increasing the probability of an interest rates hike? The answer to this question can define the behavior of the US currency for a long time.

We already had the positive report about the personal income and spending today. Even more important was the unexpected surge of the pending home sales as the housing market was one of the major reasons to worry about the US economy. The positive report supports the opinion that the previous depressing news from the housing market were caused by the negative impact of the bad weather.

Another important report is the non-farm payrolls from the Bureau of Labor Statistics Inc., as the bad employment was another excuse for the Federal Reserve to embark on its quantitative easing program. The previous very good reading set the expectations high and this may prove dangerous for the dollar, as the US currency may plummet in case the actual reading this time wouldn’t manage to justify such hopes. The report from Automatic Data Processing, Inc. about the employment change precedes the payrolls and may help to guess what the report from the BLS will show.

Not everything is bright on the horizon for the greenback, though. Despite optimism for housing and employment, despite the amazing performance of the US manufacturing, the consumer confidence index of the Conference Board Inc. is expected to drop, and drop heavily. If the expectations would prove true and the sentiment of the US consumers will deteriorate, the market sentiment may quickly follow, hammering the dollar into the ground.

Let’s look at the possible performance of the US dollar versus other currencies. Economists remained divided on their opinion about EUR/USD. Some point out that the European Central Bank speaks confidently about an interest rates hike in April, while the Fed policy makers just started to discuss the possible exit plan from the QE2. Yet many don’t think that the bullish stance on the shared European currency is warranted, considering all Europe’s problems, the collapse of Portugal’s government, after failing to convince the Parliament to accept the austerity measures, and resignation of Prime Minister Jose Socrates being just one of the many. The closest resistance level for the currency pair is at the previous peak of 1.4230, while the support level rests at 1.3795.

The Japanese yen remained quite weak and therefore analysts are bullish on USD/JPY. The rumors about a radiation contamination of the waters near the damaged nuclear power plant and overall negative impact of the earthquake, coupled with the intervention of the Group of Seven members likely won’t allow the yen to go very much higher. USD/JPY is expected to traded in the range of the previous two weeks (not counting the huge move on the intervention) – between 80.90 and 82.00.

Commodity currencies look more attractive than the greenback as the global recovery makes them more appealing. The Australian dollar has already reached the all-time high of 1.0312. The problem with the Aussie is that it has rallied for eight consecutive sessions and it’s likely to pause in the near future. In fact, the rally already slowed today. AUD/USD may decline to the previous strong resistance level of 1.0180. If the currency pair would go below parity level, 0.9940 can provide a strong support. Today’s high can be considered a level of resistance.

If you have any questions, comments or opinions regarding the US Dollar,
feel free to post them using the commentary form below.