JUL 07 DJ Forex Focus

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Dollar Should Get Its Safe Haven Status Back
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  DJ Forex Focus Wed Jul 07 03:16:00 EDT 2010 Dollar Should Get Its Safe Haven StatusBack By Nicholas HastingsA DOW JONES NEWSWIRES COLUMNLONDON (Dow Jones)--The higher the euro rises against the dollar, the further it is likely tofall.For the past month or more, the single currency has been climbing as fears of a double-diprecession in the U.S. have grown and the outlook for U.S. rate hikes has been scaled back.The loss of the dollar's safe-haven status has allowed the euro to benefit as fears over the euro-zone debt crisis subsided.See the euro's recent rally against the dollar:The market's shift in favor of the euro was emphasized by the rise in two-year German/U.S. yieldspreads all the way to +5 basis points from-30 pointsa month ago.It isn't surprising that the euro has rallied nearly 5% as those double-dip fears rippled throughfinancial markets.However, indications are that the market's fears about the stalling U.S. recovery may beoverdone.Yes, growth in the U.S.in the second half of this year is unlikely to be as strong as in the first,and the U.S. Federal Reserve is unlikely to start moving rates higher again just now.But that doesn't mean that the U.S. economy will fall back into recession or that the Fed willhave to ease monetary policy some more, as many have feared.  Daragh Maher, deputy head of global foreign exchange strategy at Credit Agricole in London,explained it thus: The double-dip brigade still need to battle against the reality that non-residential investment in equipment and software is rising strongly, as firms upgrade andmodernise their capital stock. Strong profits growth provide the ammunition for this expenditure,with rising capacity utilisation providing the impulse for action. Putthis together with strong export growth and the fact that the government's fiscal stimulus stillhas more to run later this year, and the currently bearish view of the recovery looks distinctlyoverblown. There are clearly headwinds to activity, but these point to a curtailed upswing, not an outrightreversal, Maher concluded.Of course, there are still risks abroad for the U.S. economy. Chinese growth is slowing andworries over the global recovery remain high.Not all is gloom, though, as the ReserveBank of Australia surprised markets with its moreupbeat economic assessment Tuesday suggesting that there is room for the central bank to hikerates again as early as September.Just as the pessimism surrounding the U.S. outlook has been overdone, so probably has therecent optimism over the euro zone.Certainly, recent data from the stronger core members have come in better than expected andeven the peripheral debtors have been able to continue raising funds in the open market,dispelling fears of animpending sovereign default.But the crisis in the region is far from over as politicians and the European Central Bank struggleto resolve the issue of a unified policy. Questions over the long-term sustainability of the monetary union in the face of divergingeconomies remain unresolved, said Michael Hart, a currency strategist with Citigroup.Of more immediate concern for the euro will be the stress tests on major euro-zone banks to seeif they could withstand any serious loan crisis without causingcontagion to financial markets asa whole.The results of these test are due to be released July 23 after they have been studied by the ECBand major banks.On the one hand, they could help boost confidence in the euro zone and the euro, even providingroom for the single currency to extend its gains for now.But, as Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London,warned, questions remain about whether the tests are strenuous enough: any suggestions that thefinal results are too rosy would be counterproductive. So, euro buyers should beware as the single currency's rally against the dollar appearsincreasingly unjustified.Early Wednesday in Europe, the euro was slipping as global sentiment turned negative afterTuesday's disappointing U.S. Institute for Supply Management data for non-manufacturingindustry.By 0645 GMT, the euro was down at $1.2590 from $1.2619 late on Tuesday in New York,according to EBS. It was also down at Y109.95 from Y110.42.  The dollar fell to Y87.33 from Y87.48 as the yen once again showed its safe haven status intimes of nervousness about the global economy. In Japan, the Nikkei fell 0.6% in linewith ageneral decline in Asian stocks. Disclaimer (This article is general financial information, not personalized investment advice, as it does not consider the unique circumstances affecting an individual reader's decision to buy or sell aspecific security. Dow Jones does not warrant the accuracy, completeness or timeliness of theinformation in this article, and any errors will not be made the basis for any claim against Dow Jones. The author does not invest in the instruments or markets cited in this article.)
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