2012.07.05 19:23:07 U.S. Dollar at Inflection Point When It Comes to U.S. Data

By Anusha Shrivastava

The U.S. dollar is set to lose its safe-harbor shine if growth
prospects in the U.S. deteriorate any further.

In recent months, poor U.S. economic data has been a surefire boost
for the greenback. When a weak jobs report or data on manufacturing
disappointed, investors would immediately veer away from risk and into
the dollar, often at the expense of the euro.

But weak data does hurt the longer-term attractiveness of the dollar
because it increases the chances of the Federal Reserve stepping in
and increasing the supply of dollars, a process known as quantitative
easing. Ahead of Friday's key nonfarm payrolls report for June, the
worry from some managers is growing significantly that another round
of Fed easing is coming.

"[Leaders at the Fed] are clearly weighing their decision and if we
continue to get weak data, they might announce something at their next
meeting," said Robert Gelfond, chief executive officer of MQS Asset
Management, a small hedge fund trading foreign exchange and interest
rates.

So far, the U.S. has broadly shown anemic growth. Compared with
Europe, where tight financial conditions, austerity and confidence
could result in many quarters of recession, the paltry performance in
the U.S. has been enough to keep the country's currency seen as a safe
harbor.

But Thursday, fresh data showed the U.S. non-manufacturing sector
slowed more than expected in June, as per the Institute for Supply
Management. The ISM's non-manufacturing purchasing managers' index
came in at 52.1 last month, from 53.7 in May.

If the weak data is backed by weak payrolls data Friday, "it would
tell you that a broader weakness has unfolded and that would raise the
odds outright for the Fed to expand its balance sheet even more," said
Richard Franulovich, senior currency strategist at Westpac in New
York.

In May, 69,000 jobs were added. The median forecast of economists
surveyed by Dow Jones Newswires calls for nonfarm payrolls to have
increased 95,000 in June.

Even if Europe continues to deteriorate, further U.S. weakness would
moderate Franulovich's bearish outlook for the euro. The euro fell to
a fresh one-month low of $1.2363 after the European Central Bank cut
its key rate Thursday but analysts estimate that unless the U.S.
economy shows signs of strength, the greenback will also head lower.

Westpac currently expects the euro to trade at $1.20 at the end of the
year but if there is weaker U.S. data, "that won't be realized," Mr.
Franulovich said.

In the short term, John Doyle, director of markets at Tempus
Consulting, a provider of foreign exchange and international payment
services, said the problems in Europe will "outweigh" anything that
goes on in the U.S.

"The dollar will gain in the short-term but in the long-term, it will
fall," Mr. Doyle said about the aftermath of more easing from the Fed.


Write to Anusha Shrivastava at anusha.shrivastava@wsj.com


(END) Dow Jones Newswires

July 05, 2012 13:23 ET (17:23 GMT)