The U.S. dollar will rise this week on expectations that the Federal Reserve will tighten monetary policy by the end of June or early July and that interest rates in Germany will resume their decline, foreign exchange traders and analysts said.
The dollar rose sharply Friday, particularly against the deutsche mark, on news that the U.S. unemployment rate edged down to 6.9 percent in May from 7.0 percent in April, as the economic expansion created 209,000 new non-farm jobs."There will be some follow-through buying of dollars" this week, predicted Lisa Pazer, foreign exchange analyst at MMS International. "But the world isn't dramatically changed by the employment report."
Earl Johnson, chief corporate foreign exchange trader ta Harris Trust and Savings Bank, Chicago, said, "The numbers are still mixed on the U.S. economy."
For example, he noted, U.S. factories received fewer new orders in April for the second straight month, the Commerce Department reported Friday.
With the U.S. economy growing only 0.9 percent in the first quarter, the expansion is too fragile for the Fed to tighten its policy, Mr. Johnson said. ''Still, the possibility of Fed tightening gives the dollar support," he added.
Marc Chandler, senior currency strategist at New York advisory firm I.D.E.A. Inc., said, "The Fed already has decided to raise rates, but the increase may not be implemented until early July."
Comments Friday by a senior U.S. Treasury official that a modest Fed tightening would be acceptable showed that "the White House is warmed up to the idea," Mr. Chandler said.
He said Friday's stronger-than-expected employment report will set the tone for the foreign exchange market this week and that the dollar will rise to challenge the 1.6510 deutsche mark level that technical analysts said will be a critical test of the dollar's strength.
Mr. Chandler noted that the Bundesbank, the German central bank, has not allowed its repurchase rate to decline for the last three weeks, but "(the Germans) have to resume easing" in light of the decline in the German economy.
Mr. Johnson of Harris Bank agreed. "The (economic) numbers coming out of Germany are terrible. The Bundesbank has to start easing again no matter how worried they are about growth in their money supply," he said.
The dollar "has entered a slightly higher trading range, but I can't get too excited about it," he added.
Ms. Pazer of MMS International said, "The risk to Japanese rates is also on the downside."
Meanwhile, there has been a major reversal of capital flows into Japan, she said. Data from the Tokyo Stock Exchange for May show that foreign investors are pulling their money out, she said. The speculative flows into the Tokyo market were considerable in March and April, but that source of support to the yen is not there anymore, she said.
"The party's over for the yen," Ms. Pazer said. "The Bank of Japan's in the market buying dollars every day and the U.S. administration isn't talking anymore about the need for a higher yen."
Nevertheless, "many people in the market still are talking about the
dollar falling to the 100-yen level," she said. From a technical point of view, a major test for the dollar will come at the 105.50-yen level. If that level holds, Ms. Pazer said, the dollar could rise very substantially against the yen.
The key U.S. economic report this week is the producer price index for May, which will be released on Friday.
The overall index will show a rise of 0.2 percent, Mr. Chandler of I.D.E.A. Inc. predicted, "but the core rate (excluding food and energy) could show an increase of 0.4 percent, due to higher tobacco and aircraft prices."
Ms. Pazer said, "Fed tightening expectations are at a peak for the year." She said roughly three-quarters of market participants anticipate a rise in short-term U.S. rates by the end of this month.
Following Friday's employment report, MMS International raised its estimate for second-quarter growth in U.S. gross domestic product to a 3.5 percent annual rate, up from 3.0 percent.