Dollar Poised For Additional Gains

Frankfurt  (Feb 1)  The US dollar is poised to extend its gains against most of the major currencies in the week ahead. The Japanese yen is the main exception. A combination of equity market weakness, the smaller US interest premium and the large short position leave the yen bears vulnerable to further pressure.

The yen is the only major currency to have appreciated against the dollar in January (3%). The dollar's five day moving average crossed below the 20-day average for the first time since late October on January 13. Since the multi-week low was set on January 27 near JPY101.75, the dollar has hovered around JPY102. There is some support in the JPY101.50-60 area, but if that were to be convincingly violated, it could signal another 1% slide in relative quick order.

There is little reason to expect participants to seriously try picking a bottom in the euro ahead of the ECB meeting Thursday. Selling into the occasional bounce is preferred to buying dips. At least one major German bank has predicted that the ECB adopt a negative deposit rate and cut the refi rate 5-10 basis points (from 25 presently). We are considerably less convinced, but recognize that the two pillars of ECB monetary policy (money supply and inflation) were softer than expected. At the same time we recognize that Draghi has surprised the market more than once on the accommodative side.