FX OUTLOOK-Dollar set to extend gains in week ahead

By Steven C. Johnson

NEW YORK, Aug 20 (BestGrowthStock) – The dollar and yen should
extend gains next week as worries the global economy is losing
steam burnish the currencies’ safe-haven appeal.

The bond market is suggesting the U.S. economy could be
headed for a double-dip recession, and with summer winding down
and markets bracing for highly anticipated U.S. growth data on
Friday, investors probably won’t be eager to bet against it.

Risk aversion has crept back into the market and investors
are reluctant to take on new positions in very illiquid trading
conditions, said currency strategist Michael Woolfolk.

“The last few weeks have reflected concern about the U.S.
outlook and its impact on the global economy, and that in turn
has bolstered safe-haven flows into the dollar and yen,” said
BNY Mellon currency strategist Michael Woolfolk. “We expect
those trends to continue.”

The big event for markets is on Friday when the United
States releases a revised estimate of second-quarter growth.
The first reading in July had the economy expanding at a 2.4
percent rate. Economists polled by Reuters expect that to be
cut sharply to 1.5 percent this time around.

“The gravitational pull of that report will probably pull
the euro down and push the dollar and yen higher for most of
the week,” Woolfolk said.

RISKS ABOUND

The dollar had been sold heavily in July and early August
as a string of weak U.S. economic data suggested the recovery
was stalling. Decent euro zone data blunted worries about high
debt levels in Spain, Greece and elsewhere.

But demand has since rebounded, partly because investors
now worry slower U.S. growth will put the brakes on global
growth. The U.S. two-year Treasury yield was at a record low
and the benchmark 10-year note pricing last around 2.57
percent, about a 17-month low.

A shrinking yield differential has hurt the greenback
against the yen, which has rallied to a 15-year peak around 85
per dollar. But the U.S. currency has rebounded sharply against
the euro and other major currencies.

Yields on benchmark German bunds have also slipped. Neither
the Federal Reserve nor the European Central Bank have shown
any inclination to tighten monetary policy. A top ECB
policymaker on Friday even suggested authorities should extend
emergency support to euro zone banks past year end.
[ID:nLDE67J0IR]

Next week, investors will watch Germany’s IFO report to
gauge business confidence in the euro zone’s largest country
and continue to monitor peripheral bond yields.

“Since early August, a pervasive sense of risk aversion has
taken hold of all markets,” Brown Brothers Harriman strategists
wrote in a note to clients, adding that bodes well for the
dollar.

The dollar and yen are both seen as safe-havens in times of
anxiety. Both are also used to finance purchases of
higher-yielding currencies and assets when risk appetite is
high and tend to rebound when those trades are unwound.

Japanese policymakers fear a strong yen will deepen
deflation by making exports more costly, pushing down the
Nikkei and hurting consumer confidence.

To that end, traders will watch for signals from a meeting
between Japan’s prime minister and central bank chief set for
early next week. Intervention to weaken the yen, however, is
seen as unlikely in financial markets.

As some economists have pointed out, years of deflation and
lower wage costs mean the yen is not nearly as overvalued on a
real basis and at current levels may not be quite so painful.

While yen strength looks to remain in vogue for now, Brown
Brothers says the dollar is likely to rise above 90 yen by year
end as low Japanese yields eventually encourage domestic
investors to seek higher returns elsewhere.

(Reporting by Steven C. Johnson; Editing by Andrew Hay)

FX OUTLOOK-Dollar set to extend gains in week ahead