Dollar heads for best week in nearly 2 years

By Steven C. Johnson

NEW YORK (BestGrowthStock) – The dollar on Friday chalked up its best week against major currencies in nearly two years as a lackluster Italian debt sale and tepid U.S. consumer data fed fear that slower U.S. growth would hurt the world economy.

The euro fell (Read more about the trembling euro. ) to a three-week low against the U.S. currency as spreads between peripheral European and benchmark German government bonds widened. Analysts said weak demand for Italian five- and 15-year bonds renewed fear about euro zone deficits.

U.S. data showing a smaller-than-expected rebound in July retail sales and consumer inflation at its lowest level since the 1960s also added to recent evidence that the U.S. economy has slowed considerably.

The fear, analysts say, is that if the U.S. economy slows enough, demand for Chinese goods and for the bonds of indebted euro zone countries such as Greece and Spain could dwindle.

That boosted a safe-haven bid for the greenback.

“I think we’re heading into a very volatile period, and I certainly wouldn’t rule out a couple more weeks of the dollar doing well,” said Jens Nordvig, head of G10 currency strategy at Nomura Securities in New York.

This week was shaping up to be the dollar’s best since October 2008, with an index of the greenback against six major currencies (.DXY: ) up 3.1 percent since Monday.

The euro, the biggest component of the index, wound down New York trade around $1.2151, a three-week low, down 0.6 percent on the day. It ended the week 4 percent lower, its worst week in about three months.

Strategists said the euro’s close below $1.2777, the 38.2 percent Fibonacci retracement from the pair’s June-to-August rise, is a bearish sign suggesting more euro losses ahead. The next support level is seen around $1.2610, the 50 percent retracement of the same move.

The dollar rose 0.4 percent to 86.30 yen and ended the week up about 1 percent. That was its weakest performance against major currencies, and it fell to a 15-year low beneath 85 yen earlier this week as falling U.S. bond yields prompted Japanese investors to take profits on Treasury holdings.

The euro fell (Read more about the trembling euro. ) 0.2 percent to 110.05 yen while the dollar rose 0.2 percent to 1.0522 Swiss francs.

DOLLAR ENTERING NEW PHASE

The dollar had been under heavy selling pressure since early July as investors focused on deteriorating economic conditions in the United States. But the currency rebounded sharply this week on the view that if the U.S. economy is slowing, it is not alone.

Nordvig said that has sparked an unwinding in speculative short dollar positions and carry trades in which investors borrow dollars cheaply to buy higher-yielding assets.

One target of such trades has been peripheral euro zone bonds. Worries about a euro zone debt crisis drove up Spanish and Portuguese yields earlier this year.

“People have tried to pick up some ‘carry’ in these bonds, because some were offering 200 to 300 basis points of yield, making them better than some other carry trades,” he said.

Commodity Futures Trading Commission data on Friday showed speculators increased bets against the dollar to the tune of $17.82 billion in the week to August 10.

But Nordvig said doubts about global growth and increased currency volatility may have started to make holding such positions less comfortable.

On Friday, the spread between 10-year Greek and German bonds widened to its most since the European Central Bank began a bond-buying operation on May 10, while he spread between Spanish and German 10-year government bonds also widened.

Analysts said anxiety was high enough to prevent the euro from getting a lasting bounce from data showing Germany’s economy grew more than expected.

But trading could get choppy in the weeks ahead. Nordvig pointed out that recent U.S. data, while soft, still adds up to modest growth rather than a “double-dip” recession.

“If future U.S. data comes in less bad than the consensus, that could help the dollar against the yen but support the euro and currencies like the Australian dollar, which is the most sensitive major currency to growth,” he said.

(Reporting by Steven C. Johnson and Wanfeng Zhou; Editing by Chizu Nomiyama)

Dollar heads for best week in nearly 2 years