FX OUTLOOK-U.S. dollar may resume decline next week

By Wanfeng Zhou

NEW YORK, Nov 20 - The dollar could resume its decline in a holiday-shortened week as expectations U.S. interest rates will remain low for some time prompt investors to buy assets and currencies with higher yields elsewhere.

The dollar's downtrend was interrupted in recent days as renewed worries about a global economic recovery pressured stocks and commodities and revived safe-haven demand. But analysts say the trend for a lower dollar stays intact.

Despite the Thanksgiving holiday on Thursday, a relatively heavy dose of economic data will be released next week, highlighted by preliminary U.S. gross domestic product for the third quarter. The minutes from the Federal Reserve's November meeting will also grab investors' attention.

U.S. markets will be shut on Thursday, while Monday marks a national holiday in Japan. The U.S. stock and bond markets will close early on Friday.

"Overall, the broader weaker U.S. dollar trend is still intact and we haven't really seen anything that would imply that's come to an end," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. "We're still in a period of supporting growth almost at any cost and it's too early for exit. I think that's an environment where the U.S. dollar should weaken."

The dollar has advanced 0.7 percent against a basket of currencies <.DXY> this week, while high-yield currencies such as the Australian dollar fell as investors took profits on a sharp rally in riskier assets over the past few months.

Despite this week's gains, the dollar index remains about 14 percent lower from highs set in March.

On the week, the euro fell 0.6 percent against the dollar <EUR=>. The yen strengthened this week, with the greenback down 0.7 percent <JPY=> at current prices.

Besides GDP, currency investors will also watch data on the housing, consumer and manufacturing sectors of the U.S. economy, including new and existing home sales, personal income and consumption, and durable goods orders.

A series of Treasury auctions in two-, five- and seven-year notes totaling $118 billion next week will also be in focus. Any weakness in the percentage of indirect bidders, a category that includes foreign central banks, may heighten worries about the dollar, analysts say.

EURO NERVOUSNESS

While the low borrowing costs in the United States continue to work against the dollar, the market has also become nervous about the euro.

"It has not embraced the euro in its own right, but rather has moved toward the euro because it is not the dollar and is the liquid alternative," said Marc Chandler, global head of currency research at Brown Brothers Harriman in New York.

That trend is evident in the options market, Chandler said, where the premium being paid for euro puts over euro calls made a new high for the year on Friday at 1.19 percent.

In contrast, he said, in early June the market was paying a similar premium, but for euro calls not puts.

A put option gives investors the right, but not the obligation to sell the security, while the owner of a call has the right, but not the obligation to buy.

Some traders also pointed to the euro's struggle to stay above the key $1.50 level as a sign the market may be overextended. The single currency pierced $1.50 for the first time this year on Oct. 21 but has since retreated; it was last at $1.4849 <EUR=>.

Boris Schlossberg, director of currency research at GFT Forex in New York, said the key data release in the euro zone next week is the German Ifo business sentiment reading on Tuesday.

He said the data should provide clues about whether the global economic recovery is sustainable and whether the rest of the world will continue to outperform the U.S. economy.

Should other economies show signs of a slowdown, that could see the dollar stabilize.