The US dollar will likely weaken against major currencies other than the yen in the week ahead, driven by expectations interest rates in the euro zone and elsewhere will rise faster than in the United States. Key data next week that could hurt the dollar include retail sales and international trade reports from the US and machinery orders in Japan, analysts said
The general weakness will exist despite a US employment report on Friday that was stronger than forecast and reduced expectations for a US interest rate cut. Central bank meetings in Japan and Canada will also keep investors watching currency markets after hawkish European Central Bank statements on Thursday and an interest rate hike from the Bank of England the same day.
"There is well-entrenched US dollar bearishness in the market and interest rate differentials are still the big story," said Steve Malyon, currency strategist at Scotia Capital in Toronto. "Rates have been moving higher in Europe and could move higher still, until we see stronger US data, the dollar will be bearish."
Malyon sees solid support for the euro at $1.3500 and said it could test beyond $1.37 in the near term, putting the euro at a record high against the dollar. The euro/dollar last changed hands at $1.3631.
Investors will be focused on the US retail sales report for June on Friday, said Malyon, after US international trade data for May is released on Thursday. Retail sales are seen rising 0.4 percent with international trade forecast to show a $60 billion deficit, according to Reuters polls.
Investors will be looking at retail trade data to see if the impact of the US housing slowdown is feeding into consumer spending and the broader economy. The international trade report can rock foreign exchange markets given global trade imbalances have been blamed for the dollar's structural weakness alongside US government budget deficits.
The euro also is likely to break through its current high against the dollar on a technical basis, said Tom Fitzpatrick, global head of foreign exchange strategy at CitiFX. That high is above 1.3680, according to Reuters data. The European Central Bank, which left its interest rates unchanged on Thursday at 4 percent, signalled that interest rate rises were in store.
The US benchmark interest rate, the federal funds rate, stands at 5.25 percent with investors expecting Federal Reserve interest rate policy to remain unchanged for months to come.
That compares with the Bank of England, which hiked its benchmark rate to 5.75 percent on Thursday, leaving sterling supported near 26-year peaks against the dollar. Sterling/dollar last changed hands around 2.0068.
"The ECB is giving a fairly hawkish euro undertone and the Bank of England made its move and left a hawkish undertone," said CitiFX's Fitzpatrick. The only currency against which the dollar is likely to strengthen is the yen, said Scotia's Malyon.
"Despite these periodic spikes in risk aversion, the yen will be under pressure until we see something to put the carry trade under pressure," said Malyon. Carry trades involve borrowing in a low yielding currency, such as the yen, and buying a currency with a higher yield, such as the New Zealand dollar.
Japan will release its May machinery orders report on Monday, with a forecast rise of 1.8 percent month over month, and the Bank of Japan will hold a two-day meeting ending on Thursday. CitiFX's Fitzpatrick sees the dollar caught in a fairly tight range against the yen at 122.10-25 on the downside and 123.56-66 at the upper end of the band. Dollar/yen last changed hands at 123.17.