RTRS: FXOUTLOOK-Dollar expected to rally next week
The dollar is expected to rally in the week ahead with U.S. economic data reinforcing the view that a recovery is gathering strength, making U.S. assets attractive.
The dollar has been bought and sold on rising and falling risk aversion for months but positive U.S. economic data has sometimes prompted investors to trade on fundamentals.
That happened on Friday when a U.S. Commerce Department report showed the country's trade gap narrowed unexpectedly in August, and analysts suggest the trend will continue with strong data, including U.S. retail sales, coming in the next week.
"Fundamentals are driving the direction of the dollar," said Kathy Lien, director of currency research at GFT. "We see that with good trade data and there will be positive data in the week ahead.
The dollar was mostly higher on Friday, with an added boost after Federal Reserve Chairman Ben Bernanke said late on Thursday that the U.S. central bank was ready to tighten monetary policy as the economy picks up. The dollar, however, was down for the week.
Over the last five days, the dollar rose 0.3 percent against the yen at current prices, including a 1.4 percent advance on Friday, while the euro rose 0.7 percent against the dollar.
The dollar index, which measures the dollar against a basket of six currencies, fell 0.7 percent for the week and touched a 14-month low during the week.
The technical outlook for the dollar is mixed.
Investors have also been short the dollar since May, according to Commodity Futures Trading Commission and Reuters data. If the dollar continues its upward momentum, some investors who bet against the dollar will be forced to buy to cover positions and reduce their losses.
"Dollar short positions are very extended and there is a chance we will see a rebound," Lien said.
But Andrew Bekoff, chief investment officer for Family Office Group in New York, said looking further out the dollar downtrend should remain intact, despite a 17.5 percent decline in the dollar index since the early March peak.
"Technically we are oversold but we can stay that way for a very long time," said Bekoff. "The retreat has been given unprecedented attention but the solution to stabilizing the currency remains allusive."
