The US dollar and Swiss franc are likely to hold gains next week should tensions in Egypt persist, raising concerns about stability in the Middle East and North Africa and increasing investor demand for safer havens.
-- Egyptian civil unrest prompts safe-haven buying
-- Yen recovers after fall on demand from Japan exporters
-- Emerging market currencies down sharply versus dollar
A slew of economic data and central bank decisions is due next week, including the US government's closely watched monthly non-farm payrolls report, but analysts said civil unrest in Egypt, if not contained, could easily trump macro fundamentals. Both the dollar and Swiss franc rallied on Friday, with the greenback and franc rising 0.8 percent and 1.2 percent, respectively, against the euro.
Emerging market currencies also sold off, led by the Turkish lira and the Israeli shekel as news reports showed dozens of people were wounded after police and demonstrators fought in the streets of Cairo in protests against President Hosni Mubarak's three-decade rule. With Egyptian markets closed on Fridays and Saturdays, investors sold shekels and lira and bought the dollar in a proxy trade during the unrest.
Oil futures also surged on the unrest in Egypt, rising 4.3 percent to $89.36 per barrel on fear that prices may continue spiking from current levels. "This could really encompass the region. Egypt is really the pivot point in the entire Arab world and has implications for things like the price of oil," said Dan Dorrow, head of research at FX advisory and execution firm Faros Trading in Stamford, Connecticut. "If Monday looks a lot like today, then the political risk premium will swamp any kind of central bank and economic fundamentals and we could see more safe-haven moves to the Swiss franc."
Spot gold also rose on Friday as investors sought protection from political risk, rising 2.0 percent at $1,337.50 per ounce. Next week, the biggest focus will be the release on Friday of January US employment, with the economy expected to have created 146,000 jobs in the month. But unless the report shows a blockbuster number, the dollar is unlikely to gain much from it.
In late afternoon trading, the euro fell 0.8 percent to $1.3615. Earlier it fell as low as $1.3584 on electronic trading platform EBS, just shy of $1.3570, the 50 percent retracement of its decline from November to January. As the euro's recent rally lost momentum, Goldman Sachs said in a research note on Friday it closed its long euro/dollar position, with a gain of about 2.7 percent.
Goldman's chief FX strategist, Thomas Stolper, however, said in an e-mail the bank remains constructive on the euro and expects it to hit $1.40 in three months, $1.45 in six months, and $1.50 in one year.
Meanwhile, euro positioning in the latest week remained on the long side, data from the Commodity Futures Trading Commission showed, as the value of the dollar's short position rose to the highest in two months. The euro fell 1.2 percent against the Swiss franc to 1.2826 francs while the dollar dropped 0.4 percent versus the franc to 0.9419.
In the emerging market world, the dollar rose to a four-month high against the Israeli shekel, up 1.7 percent at 3.7090. Jitters spread over to the Turkish lira, which fell to a seven-month low against the greenback. Late afternoon, the dollar surged 2.3 percent against the Turkish lira to 1.6132. The Egyptian pound weakened sharply this week due to the turmoil, while the Egyptian EGX-30 equity index is down more than 22 percent from its January peak. With no trading on Friday, further losses are likely when trading resumes.
Win Thin, global head of emerging market strategy at Brown Brothers Harriman, said while Egypt has a small economy and no longer is a major player in oil exports after it turned net oil importer, it is an important geopolitical player. Thin noted that Egypt is only one of two Arab countries that have signed peace treaties with Israel - the other being Jordan - and therefore the United States considers it as an important ally in the region.