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Dollar buyers are probably poised in the wings waiting for a Fed re-think.
Reasons for buying the U.S. currency are almost all in place. About the only thing stopping a rally now is fear that the U.S. central bank is still entertaining more quantitative easing.
In fact, a story in The Wall Street Journal last week, which suggested the Fed is looking at ways of sterilizing any further bond buying, injected even more caution into the investment community.
However, the Fed could turn dollar sentiment around this week if it uses its latest open market committee meeting Tuesday to hint that its policy stance is turning more hawkish. And there is little reason why it shouldn’t.
As the latest nonfarm payroll data showed Friday, the U.S. labor market is improving with the economy adding a healthy average of 247,000 jobs a month over the past three months.
Although there is little sign of this boosting hourly earnings just yet, there are indications that strengthened consumer confidence is helping to boost retail sales.
Figures this week are expected to show that sales rose by as much as 1.3% last month after a much more tame 0.4% increase in January.
The Fed is also expected to respond to the recent rise in crude oil prices which, if sustained, will soon lead to inflationary price pressures in the economy.
Expectations that the Fed might shift its stance on more quantitative easing has already helped to push Treasury yields higher, with the yields on the benchmark 10-year reaching a new recent high at 2.06% at the end of last week.
New figures from the Chicago Mercantile Exchange also showed that speculators are starting to prepare for a dollar rally with long dollar positions against most other majors increasing.
Certainly the euro’s tepid response to Greece’s debt bailout package last week goes to show just how little enthusiasm there is for the single currency.
Not only is the implementation of the country’s austerity measures still under question ahead of Greek elections that are likely in the next few months–government officials have said they will be held in April–but other peripheral euro-zone debtors are still at risk from contagion, while Germany continues to resist attempts to construct a firewall.
So instead of leaping higher on news that Greek had finally reached a deal, the euro has eased a little.
And it isn’t only the debt crisis that is posing a problem.
Data showing that exports from China to the euro zone slowed much more than expected last month have once again focused market attention on the sharp imbalances between the core countries, such as Germany, and the peripheral ones.
Without further fiscal integration, the divergence between the fast-growing core and the shrinking peripherals is only likely to increase and thereby magnify the lingering debt problems.
Apart from looking more attractive against the euro, the dollar should also be seen in a better light against the yen and the Swiss franc as well as the currencies of many emerging markets, where growth remains a concern and monetary policy is likely to remain biased towards further easing.
(Nicholas Hastings is a Senior Correspondent in London for Dow Jones Newswires who has written about foreign exchange for more than 20 years. He previously covered a variety of markets, including equities, fixed income, commodities and energy. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com or on twitter @NickHastingsDJ)
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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