Fundamental Outlook for US Dollar: Bullish

- Service-Based Activity Expands at Faster Pace
- FOMC Maintains Cautious Tone on High Unemployment
- Consumer Credit Tumbles Lower in February

The U.S. dollar lost ground against most of its major counterparts as investors raised their appetite for risk, and the reserve currency is likely to face increased volatility over the following week as the economic docket is expected to reinforce an improved outlook for future growth. At the same time, Fed Chairman Bernanke is scheduled to testify in front of the Joint Economic Committee of Congress next Wednesday at 14:00 GMT and is anticipated to speak on the outlook for the world’s largest economy, and comments from the central bank head is likely to move the major currencies as investors weigh the prospects for future policy.

A government report due out on Monday is expected to show a budget deficit of $67.5B in March following the $191.06B short-fall in the previous month, and the ongoing imbalances in public finances could hamper the long-term outlook for the greenback as the nation’s credit rating remains at risk. Meanwhile, a rise in consumer prices paired with a third consecutive gain in household spending is likely to instill an improved outlook for future growth, and the Fed’s Beige Book due out on Wednesday could denote a more positive tone for the private sector as the expansion in monetary and fiscal policy continues to feed through the real economy. However, Fed Chairman Bernanke is likely to hold a dovish tone during his testimony in front of the Joint Economic Committee, and a reinforcement of the central bank’s pledge to hold borrowing costs at the record-low for an “extended period” of time could certainly drag on interest rate expectations as Mr. Bernanke expects to see a “nascent” recovery this year.

Nevertheless, as risk trends continue to have an impact on the currency market, positive economic developments in the U.S. could encourage an improved outlook for global growth and lead market participants to seek higher yielding investments, but the correlation between the reserve currency and risk is likely to deviate over the near-term as the Fed aims to normalize policy this year. Consequently, the U.S. dollar could react favorably to the slew of data next week as the economic recovery gathers momentum, and a rise in interest rate expectations would certainly stoke a rise in the greenback as the central bank maintains its dual mandate to ensure price stability while promoting full-employment.

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