The dollar had its worst week in at least three months last week, but with a key Federal Reserve meeting looming Wednesday the greenback could rebound if the Fed acknowledges inflation risks or hints at tighter monetary policy.
The dollar, measured against a basket of currencies, plummeted to its lowest level since before the financial crisis of 2008, a mark of how broadly unwanted it is. One factor in that selloff was the speculation that China might announce a one-time revaluation in the yuan, a risk that traders wanted to be prepared for as they entered an Easter holiday-lengthened weekend.
But given the anticipation ahead of Wednesday's Fed meeting, after which Chairman Ben Bernanke will give his first-ever post-meeting news conference, there is a chance that some anti-dollar bets will be unwound early in the week if no such news comes from China.
Relative yield differentials have become a driving force for the dollar's decline. Although the euro zone has been riveted by a debt crisis, the European Central Bank is entering a policy tightening cycle that has sent the euro soaring. Conversely, the dollar has been hurt by the Fed's determination to maintain low interest rates and continue with a controversial $600-billion U.S. stimulus program.
Central bankers around the world are responding to soaring energy- and commodity-driven inflation by tightening monetary policy, while "the Fed remains on hold with extremely easy monetary policy," he added.
The dollar has fallen especially far against currencies of major commodity-producing nations, plunging to a 29-year low against the Australian dollar and a 3½-year low against the Canadian dollar.
But the market, which has become very comfortable being short the dollar, could be vulnerable to a sudden shift in sentiment should the Fed surprise investors with an unexpectedly hawkish statement. Recently, a debate has spilled into the open that reflects a split between the central bank's vigilantly anti-inflation members and those more preoccupied with sluggish job creation.
The latest weekly commitment of traders report by the U.S. Commodity Futures Trading Commission shows that, excluding the yen, net short dollar positions totaled $24.9 billion U.S. against its seven major counterparts, levels unseen since 2007. With the exception of the Japanese currency, traders are now net long every other major currency against the dollar, in a gamble that the greenback will extend its decline.
However, the dovish policy makers who dominate Mr. Bernanke's inner circle appear to have the upper hand. That, analysts say, is a reflection of the fact that unemployment remains high, with the Fed assiduous in its efforts to address the employment component of its dual mandate to battle inflation and joblessness.
Even so, the dollar may be due for a modest respite, given that the Fed is due to complete its program of quantitative easing, or purchases of Treasury securities, in June.
Late Friday, the euro was at $1.4548 U.S. from $1.4558 U.S. late Thursday. The dollar fetched ¥81.91 from ¥81.83, while the euro was at ¥119.17 from ¥119.12. The U.K. pound traded at $1.6516 from $1.6528. The dollar was unchanged against the Swiss franc at 0.8857.
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