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FX COLUMN-Dollar consolidation may open the way back up

Rick Lloyd is an FX market analyst for Reuters. The opinions expressed are his own

SINGAPORE, March 10 (Reuters) – With the U.S. dollar consolidation into its sixth week, the market is searching for the ultimate resolution of this range-trade and the next big move.

For dollar bulls, the inability of the euro EUR= to make any sizeable gains above $1.3700 on better news on Greek’s debt crisis has encouraged the view that the dollar is surely on a bull run.

Meanwhile, the dollar bears point to the triple bottom formed in the euro just below $1.3450 as a technical reason to expect the consolidation to end with a higher euro and lower dollar.

The problems besetting peripheral EU countries as well as Britain, do not seem likely to be resolved soon.

Because the deficit problem are structural they will take time to be resolved. Any progress seen thus far can only be described as the first step towards a possible resolution.

Simultaneously, economic data out of the United States has started to show some positive signs, although it is hard to call this as a robust recovery.

Last Friday’s U.S. employment data seems to point to bottoming unemployment and a gradual recovery in employment.

With the Fed beginning to discuss the first steps towards normalisation of monetary policy and Europe and Britain focused on domestic problems, it is hard to imagine that the euro will be able to manage a big recovery in the coming weeks and months.

Turning to the U.S. dollar index .DXY, the consolidation is evident in the fact that for the past five weeks, the index has closed within a 22 point range between 80.33 and 80.55. The rally in the index has also stalled just below the high seen on June 8 2009 at 81.47.

For the rally to resume, which seems the most likely outcome, a weekly close above this level will be needed.

Meanwhile, commodity currencies are likely to outperform euro and sterling GBP=, having broken recent highs and moved into territory not seen for 25 years in the case of Aussie against the pound AUDGBP=.

With the fundamental story in these countries completely different from Europe, this trend seems to have room left in it.

Despite a great deal of nervousness earlier in the year about moves by China in particular to rein in its booming economy, the Asian growth story is on track to keep commodity currencies in a relatively buoyant state.

Booming Chinese exports, up 45.7 percent year on year in February, support this view.

In conclusion, the way to play the rangebound market would appear to be buying commodity currencies on dips and selling euro and sterling on any rallies. If the breakout leads to a stronger dollar, as expected, that would be a good opportunity to add to the short euro and sterling positions. (Editing by Jan Dahinten)
[Reuters]

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