By Paul Evans and Robert Flint
Of DOW JONES NEWSWIRES
TORONTO (Dow Jones)--The dollar is likely to continue to sink next week amid growing appetite for non-U.S. assets and signs of apparent official resignation at the dollar's decline.
Mounting faith in economic recovery has reduced the dollar's safe-haven appeal, while global interest-rate dynamics have fostered the use of the dollar as a funding currency for riskier investments.
The lukewarm lip-service paid to the dollar's decline in recent statements by some international monetary officials doesn't pose much of an obstacle to the U.S. currency's slide, either.
Moreover, if companies continue to report encouraging results in the slew of corporate earnings reports on tap next week, the euro and other higher-yielding currencies should gain ground on the dollar.
Given the list of negatives, currency strategists at Barclay's Capital said that "it is surprising that the dollar is not even weaker."
Against this background, analysts expect the euro to trade between $1.47 and $1.50 in the coming week, while the U.S. currency fluctuates between Y87.50 and Y91.0.
Late Friday in New York, the euro was at $1.4696 from $1.4790 late Thursday. The dollar was at Y89.86 from Y88.42 Thursday, according to EBS via CQG. The euro was at Y132.01 from Y130.75 Thursday. The U.K. pound was at $1.5843 from $1.6080 and the dollar was at CHF1.0335 from CHF1.0264.
The dollar received a day of respite Friday, rising against the euro and yen as investors took profits and adjusted positions ahead of the long weekend due to holidays Monday in the U.S., Canada and Japan. However, the rally isn't expected to last.
"We still have trouble finding U.S. dollar positives in this market," Barclays' strategists said, adding that they "expect broad dollar weakness" in the coming week as the Federal Reserve's dovish policy stance increasingly contrasts with a small, but growing, list of central banks where interest-rate increases are real possibilities.
Global interest-rate dynamics came into focus last week when Australia became the first major central bank to raise its key policy rate since the world became enveloped in financial crisis.
The prospect of U.S. rates remaining at ultra-low levels for a while longer yet is one important element, along with rising risk appetites, in the dollar's increasing use as a funding currency, whereby investors borrow dollars on the cheap and use them to finance bets in riskier currencies and other assets.
These trends have in recent days brought the dollar to the brink of some significant levels against the euro, yen, and other currencies. Moving beyond these levels in the near term would likely add further impetus to the dollar's downtrend, according to most currency watchers.
"We are getting near some pretty important levels," said senior currency strategist David Watt of RBC Capital Markets.
He predicted that the dollar will remain under consistent downward pressure next week, but will likely avoid any rapid gaps lower.
Before the dollar's week-ending rally Friday, the euro had climbed close to the $1.4850 region that repelled previous advances last month and late in 2008.
The mid-$1.4800 range is also significant since it represents the euro's level in September 2008 before spiraling financial panic ignited widespread safe-haven demand for dollars.
"We've unwound all of that premium that got built into the dollar over the last year," Watt said. "That move upwards was based on a lack of U.S. dollar liquidity, which certainly isn't the situation now when dollar liquidity is extremely high."
The shedding of safe-haven dollars in favor of higher-yielding or more growth-sensitive currencies has also brought the dollar closer to some key psychological levels against the Canadian and Australian dollars.
Over the past week, these commodity-linked currencies soared to year-plus highs against the dollar, aided not only by the Australian central bank's rate increase, but by strong employment reports in both countries.
Now, the prospect of parity between the Canadian and U.S. dollars is seen as beginning to exert an attraction for the Canadian currency, in particular.
Currency strategist Camilla Sutton of Scotia Capital in Toronto likened parity to a magnet that will exert a more powerful attraction for the Canadian dollar the closer it moves towards it, even if moves beyond parity for the Canadian unit likely won't be sustainable until at least next year.
"I think it's very similar to 2007, the last time we went to parity. The closer we got to it, the more focused investors, fund managers [and] media got on that parity level," Sutton said. "I think it starts to have a life of its own, and really does start to act as a magnet," she said.
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