Forex Outlook

China, Greece news to drive US dollar

NEW YORK: For the US dollar, next week is shaping up as a tale of two cities, with news from Beijing and Athens, rather than US economic data, likely to exert the most immediate influence on the greenback.

With China’s economy having grown in the first quarter at its fastest clip since 2007, investors are on high alert for signs of tighter monetary policy or a revaluation of the yuan.

Since mid-2008, China has held the dollar at 6.82 yuan to blunt the impact of the global financial crisis, but mounting pressure from inflation at home and angry US lawmakers abroad has markets bracing for a firmer yuan.

In a speech on Friday, Chinese President Hu Jintao said Beijing would adopt a floating exchange rate system gradually, sending the yuan higher against the dollar in the one-month offshore non-deliverable forward market.

Greece, facing ever-rising borrowing costs from private capital markets, said it was preparing to activate an emergency European Union-International Monetary Fund aid plan.

Analysts said news from both places should pull the dollar in different directions, with the greenback falling against the Japanese yen and other Asian currencies and likely to remain firm against the euro.

“Until we get a huge surprise on the data front, I think Greece and China have been the two dominant stories over the past couple of weeks and they will very much remain so,” said Wells Fargo currency strategist Vassili Serebriakov.

While the euro may bounce if Greece activates an EU-IMF 30 billion euro ($40.5 billion) aid plan, analysts said it will continue to struggle against the dollar en route to an eventual fall below $1.30, a level last breached a year ago.

“Investors think Greece tapping aid will just push the problem down the road,” said Michael Malpede, analyst at Easy Forex in Chicago. “It won’t go away, and a bailout will raise questions about what to do with other EU countries if they put their hands out. It’s the tip of the iceberg.”

The euro has lost almost 6.0 percent versus the dollar this year, a decline that began when Athens revealed that its 2009 budget deficit was twice as high as markets thought.

That has lifted Greece’s borrowing costs and raised doubts about whether the country can remain solvent. Analysts say that should keep eurozone interest rates at record lows longer than those in the United States, another positive for the dollar.

Bank of Canada move also in focus: The implication of future Chinese policy decisions are less clear cut, analysts say. The timing of any move on currency policy and the amount China lets the currency rise are still unknown.

Offshore forward contracts are pricing in a dollar that buys 6.61 yuan in a year, about three percent less than now.

Expectations of a firmer yuan should also boost other Asian currencies against the dollar, though a move could put a strain on other countries in the region, Malpede said.

“It could be a double-edged sword, as a stronger yuan will make their exports cheaper but might require them to intervene to keep their currencies from rising too much,” he said.

If China were to hike bank reserve requirements or interest rates, he said it could hurt the Australian dollar and other commodity-sensitive currencies.

But analysts at Morgan Stanley said de-pegging the yuan from the dollar could have a marginally favorable impact on emerging market currencies and other risky assets, as it will increase Chinese purchasing power.

Investors will also keep a close eye on the Bank of Canada’s interest rate decision next week. While no move is expected, economists polled by Reuters expect the central bank to lift rates from record lows in July, possibly ahead of the Federal Reserve.

But while that should keep the Canadian dollar near parity against its US counterpart, the scope for further gains is limited, as strong Canadian economic data and higher rate expectations have been priced in, analysts said.

The U.S. data calendar is light, with jobless claims and durable goods orders due late next week.

“Overall, it looks like (the US economy) is in something of a sweet spot. Growth is picking up, but not too strongly as to trigger a Fed move. The inflation numbers are subdued.” Serebriakov said. “But I think we’re going to have a hard time linking dollar moves to economic data these days.” reuters

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