Looking for pockets of dollar strength - Greenback's weakness is neither relentless nor without exceptions

SAN FRANCISCO (MarketWatch) -- One hears so much about the battered dollar lately that it's easy to forget the greenback is beating up a few of its major rivals, and will likely continue to do so this month -- and might even take a swing at some of the big bullies that have been knocking it down the most.

Investors betting on a further dollar fall against the euro and the yen should prepare for the possibility that the dollar could make up a bit of lost ground against either one - or possibly both. Moreover, the dollar is likely to keep gaining on its Canadian counterpart, which has been hurt by lower U.S. growth prospects.
"In April we are expecting to see further stabilization and a modest recovery in the U.S. dollar. This will create a foundation for a more sustained recovery later in the year," said Adam Hewison, president of MarketClub.com, an Annapolis, Maryland-based a technical analysis site.

"It would appear that U.S. interest rates are at or close to their lows for the year. We had been looking for the Fed funds rate to trade down to the 2 to 2 .5%-level. We feel the market has achieved that downside target zone," said Hewison.

'Poor ol' loonie'

The dollar has gained more than 3% against the Canadian dollar this year.
The loonie, as it is commonly called, is a commodity-linked currency, meaning it usually rises and falls in line with crude oil futures, which are priced in dollars. But this time, its fall coincided with a record rise in crude futures, with the front-month contract up more than 5% so far in the first three months of 2008.
The Canadian dollar "slumped despite rising oil price because of the bigger picture fact that 80% of exports go to the U.S. and that geographically its, well, right there on the doorstep," said Andrew Wilkinson, senior market analyst at Interactive Brokers.

This point was not lost on Canada's central bank, which cut its benchmark interest rate by a half-percentage point to 3.5% early last month and laid the blame south of the border.

"The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. These developments suggest that important downside risks to Canada's economic outlook that were identified are materializing and, in some respects, intensifying," the Bank of Canada said the day it cut rates.
And higher oil prices would make it worse, not better.

Rather than lift the Canadian dollar, as they often did in the past, high oil prices "could worsen the outlook for U.S. consumer spending and therefore Canadian output, exerting more pressure on the poor ol' loonie," said Wilkinson.

Euro, yen

Analysts are mixed when it comes to how the buck will fare in the coming weeks against the big two: the euro and the yen. So far, the euro has gained more than 8% this year against the dollar, while the latter shed about 11% against Japan's currency.

While many see pressure on the dollar continuing, some say there's a chance the dollar could regain lost ground by the end of April.
Last month, the Ides of March were literally a day late and a dollar short -- a dollar short-sell opportunity, that is.

On Sunday, March 16, the Federal Reserve took the extraordinary step of cutting its discount rate by a quarter percentage point to 3.25% and offered to lend money to an unprecedented list of firms. This, combined with news of J.P. Morgan's Fed-blessed firesale purchase of ailing brokerage Bear Stearns Cos., sent the greenback plunging in early trading Monday.
The euro topped at $1.5903, its highest level since it began trading in January 1999. Against Japan's currency, the dollar slid to a new 12-year low of 95.75 yen.
But even some analysts who think the euro still has upside potential don't expect April to end on a high note for the European unit.

"I think the market will take the euro through its record highs in the coming week and in April will probably come a bit lower," said Meg Browne, strategist at Brown Brothers Harriman. "April could see the euro come off its new high."

Part of this, she said, it due to low expectations for U.S. economic data, making market positions vulnerable to an upside surprise - or a downside surprise in the eurozone, where the effects of the strong currency could begin to show up.

"The market's priced in a lot of negative U.S. news," she said.

"If there is any sign of improvement in the next month's worth of housing or manufacturing data or some sign consumption's not so bad, and if we see signs of weakness in Europe -- maybe it becomes more apparent that non-German countries are deteriorating, or if German data somehow weakens -- sentiment is likely to shift in favor of the buck," said Browne.

Against the yen, the dollar is still trading significantly above its post-World War II low of 79.85, set in April 1995, and some analysts don't expect to see anything around that level anytime soon.

"The Japanese outlook is increasingly fraught with risk, and there is little to no expectation of confident leadership through any turmoil," wrote David Watt, senior currency strategist at RBC Capital Markets.

"Apart from carry trade unwinding and risk aversion, there is little to no reason to be bullish on Japanese yen. As a result, data releases will likely pose more upside risk to dollar/yen than downside risk, particularly those that suggest the Japanese economy is slowing," he said.

Lisa Twaronite reports for MarketWatch from San Francisco.
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