Fundamental Outlook for US Dollar: Bearish

- US Dollar Index Breaks Key Support, Signals Losses Ahead
- Retail Sales Fell Less than Expected in February
- Chinese Premier Questions the Safety of US Assets

US Dollar weakness is set to continue in the coming week as an upward correction in risky assets sends capital out of safe haven assets in search of yield. Last week, the US Dollar Index conclusively broke below a rising trend line that had guided prices higher since mid-December, opening the door for an extended pullback against the spectrum of major currencies. Indeed, the greenback’s average value against its major counterparts is now -93.7% inversely correlated with the MSCI World Stock Index. The Australian and New Zealand Dollars are likely to be the key beneficiaries once again as lucrative yields at 3.25% and 3.00% attract investors.

Although the economic calendar packs plenty of high-profile releases, traders are unlikely to see anything that has not already been priced into the exchange rate. Manufacturing sentiment is expected to sour once again, core inflation metrics are set to continue inching lower, and the rate decision from the Federal Reserve has no room to surprise with rates effectively at nil already. None of these developments add anything new to the established landscape and are unlikely to stir significant volatility across the forex markets. The statement accompanying the rate announcement seems to pack less punch than usual as well considering Ben Bernanke and company are already throwing the monetary policy equivalent of everything but the kitchen sink at borrowing costs.

The weekend’s G20 summit presents a wildcard. Yesterday, Chinese premier Wen Jiabao bluntly questioned the security of US assets, saying American lawmakers need to “ensure” their safety and musing that “We have lent a huge amount of money to the United States… of course we are concerned about the safety of our assets. To be honest, I am a little bit worried.” The Chinese government has little reason to want to talk down the US Dollar because the comparatively cheaper Yuan helps support an already suffering export sector, so Wen’s comments should not be taken lightly. If this kind of rhetoric sees any significant traction at the G20 meeting, the greenback’s correction may prove significantly deeper than otherwise expected.

Jamie Saettele is a Technical Currency Analyst for FXCM.