FOREX week ahead: US Data Turnaround Could Spur Dollar Rise

by Andrew J. Johnson (Dow Jones)

If U.S. economic data start to heat up this summer just as Greece is melting down, expect the dollar to rally.

Once, better U.S. data might have been an excuse to bid up the growth-sensitive euro, based on confidence in the global economy. But traders are increasingly concerned about contagion from a potential Greek debt default, which has helped the dollar start recovering against the euro.

Now, it wouldn't take much of an improvement in U.S. indicators to lift the dollar further, several currency analysts said.

The upcoming week will certainly put that notion to the test because there is a slew of important indicators scheduled measuring U.S. inflation, industrial production, retail sales and housing starts. Importantly, the data should go a long way in answering a big market question: whether the recent poor U.S. data was just a proverbial soft patch--caused in part by growth-sapping high commodity prices.

"Most people feel like the [U.S.] economy will get better," said David Woo, head of G10 global rates and currencies research at Bank of America Merrill Lynch. The market consensus is that the recent round of poor U.S. data was just a bad batch.

Federal Reserve officials and private economists both project stronger U.S. growth in the second half of this year. Much of those expectations are based on optimism about U.S. corporations.

Ford Motor Co. (F) said earlier this week that its vehicle sales in China totaled 45,162 units in May, up 14% from a year earlier. Sales for the first five months of the year rose 15% year-to-year to 230,068 units. Federal Reserve Bank of Dallas President Richard Fisher said the U.S. central bank provided enough "fuel" via stimulus to help the U.S. economy grow by as much as 4% in the second half.

Yet U.S. growth doesn't even have to live up to these expectations to lift the dollar much, said Michael Woolfolk, senior currency strategist at BNY Mellon. That's because he figures that austerity programs and the costs of bailing out Greece will slow euro-zone growth to 2% in the second half of this year. And that will in turn take a bite of the euro--sending the dollar's rival down to $1.38 early next year from its current $1.43 level.

Many investors are skeptical about the recent bad U.S. data, said Mark McCormick, currency analyst with Brown Brothers Harriman.

That's in part because March's Japan tsunami and earthquake disrupted global supply chains--especially in the auto sector, said McCormick. Much of that was reflected in the weak U.S. data. "A lot of things we are seeing are temporary in nature," he said.