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Wishful thinking

Wishful thinking

NEW YORK, July 3 (Reuters) – The dollar may build on its gains next week now that the latest U.S. jobs data has failed to confirm the market’s worst fears, keeping alive the prospect of higher U.S. interest rates before the year is out.
While the U.S. economy remains weak, things could be worse for the dollar, which dodged two bullets this week and headed into a three-day weekend up sharply against major currencies.
U.S. data on Thursday showed the economy shed jobs in June for a sixth straight month, but the decline was not as severe as financial markets had feared.
Dollar buying accelerated after European Central Bank President Jean-Claude Trichet said the bank’s move to hike interest rates to 4.25 percent would help achieve price stability, dousing market expectations of more hikes ahead.
Investors had feared that hefty U.S. job losses and a hawkish ECB intent on fighting inflation with multiple rate hikes — while the Federal Reserve stays on the sidelines — would send the euro soaring to a new record above $1.60 .
Instead, the payrolls data and cautious ECB “is moderately good news” for the dollar because “it does not prevent the Fed from possibly raising rates in September,” said Boris Schlossberg, currency strategist at DailyFX.com in New York.
Markets are pricing in a half point of Fed rate hikes by year end.
The euro fell more than two cents against the dollar on Thursday and was on track for its worst week in the last three.
The U.S. and euro zone economic calendars are thin next week, but analysts say a quiet week may be just what the embattled dollar needs.
“The risk until now had been that the euro would break above $1.60 and keep moving higher, but that risk has dissipated somewhat,” said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.
“My sense is there’s a reasonable chance that the dollar could build on its gains next week,” he added, “primarily because there is not going to be much new on tap.”
Meg Browne, currency strategist at Brown Brothers Harriman in New York, said the euro could slip to $1.56 next week.
Markets will get two chances to hear Fed Chairman Ben Bernanke speak, with Thursday’s testimony before Congress about financial market regulation likely to get the most attention.
A Group of Eight meeting in Japan will also be watched for any comments about currencies or the high price of oil.
In the long run, it still looks like an uphill climb for the dollar, analysts say, as continued economic weakness will complicate the Fed’s future interest rate decisions even as the price of oil hits record highs near $150 and inflation mounts.
Meanwhile, consumer confidence continues to weaken, making Friday’s preliminary Reuters/University of Michigan survey of consumer sentiment of particular interest.
Analysts say the yen’s fortunes are likely to wax and wane with equity prices and investor risk appetite, though Bennenbroek said investors should be on guard for weakness in emerging Asian currencies, such as the Korean won , which continue to struggle with the impact of high oil prices.

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