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US Dollar looks Vulnerable

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US Dollar looks Vulnerable

Signs the US dollar will continue to face downward pressure are escalating, erasing hope 2014 would be the year the world’s most actively trade currency came climbing back.

The outlook on the dollar is blurry, as the global financial markets weigh economic developments in the US against the emerging threat of the Japanese yen. According to some, the yen holds the key to the US dollar’s performance moving forward.

The Bank of Japan’s unprecedented stimulus program, now in its second year, has had a significant impact on the currency markets. But rather than simply devaluing the Japanese currency, quantitative easing boosted consumer prices and encouraged regional neighbours to weaken their own currencies in response.

Add to the mix an increasingly risk-averse trading environment and the result is a stronger yen, which may encourage a broad sell-off of the US dollar.

At home, the US dollar faces several question marks ranging from the housing sector to slack in the labour market and up to monetary policy. Economic data continue to be mixed, fueling speculation the recovery may be losing momentum. First quarter growth slowed to a crawl, and latest figures suggest the economy actually contracted in the first three months of the year.

The labour market recovery, while positive, continues to be uneven, with wage growth virtually non-existent. US consumer confidence declined this month as concerns about a lack of income growth weighed on sentiment, according to the University of Michigan’s consumer sentiment index.

The housing sector, while rebounding sharply in April, continues to be a limiting factor, as declining affordability has slowed buyer traffic and overall sales. It seems evident the market, at its current growth pace, is unable to fully absorb the impact of higher mortgage rates.

Additionally, the Federal Reserve remains purposely vague about interest rates, giving conflicting accounts about when the first rate hike could occur. US dollar bulls are concerned the central bank may keep interest rates at record lows well into 2015.

These factors have exhausted the dollar, which earlier this month fell to its lowest level since October, threatening to expose the low from 2011 that resulted from the loss of the US’ triple-A credit rating.

2014 was forecast to be the year of the dollar. Deepening US recovery was supposed to lead to the full elimination of stimulus, which would pave the way for higher interest rates. Although the Fed looks poised to close the book on quantitative easing this year, this has not translated into sustained support for the dollar.

The US dollar index, a weighted average of the dollar’s performance versus six major peers, was unchanged at 80.01. The dollar failed to generate momentum after housing starts and building permits rebounded sharply in April, according to the Commerce Department. Building permits surged 8 percent to a seasonally adjusted annual pace of 1.08 million, and housing starts increased more than 13 percent to a 1.072 million pace.

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