Underlying confidence in the US dollar will remain weak in the short term with a lack of confidence in the debt situation. Optimism over the global economy will also reduce defensive demand while there will be further underlying fears over medium-term diversification away from the dollar. Caution is required over the global economy given that there are still substantial risks with markets getting ahead of the situation. The dollar should also be supported by a higher domestic savings ratio. Momentum for a weaker dollar will remain powerful in the near term with the risk of a move to 1.4330 region before a sharp corrective dollar recovery.
The dollar was unable to regain ground during in early Europe on Friday and was then subjected to further selling pressure during the day. The Euro strengthened to fresh 2009 highs with a peak above 1.4150 in US trading. There was momentum selling and the dollar was also unsettled by further strong interest in commodities.
The US currency was again undermined by fears over reserve diversification by foreign central banks after comments from the South Korean central bank that it was looking to reduce its US debt holdings. There was also speculation that the Russian central bank was looking to reduce its dollar holdings.
The Chicago PMI manufacturing index was significantly weaker than expected with a decline to 34.9 in May from 40.1 the previous month and in contrast to expectations of a small recovery. There was a sharp decline in most components and there will be some renewed fears over the outlook, although the data may have been distorted by specific weakness in the auto sector. The University of Michigan consumer confidence index continued to move higher in the final May survey.
The US currency remained on the defensive on Monday beyond 1.42 against the Euro with the GM bankruptcy plan also unsettling confidence.