Dollar - The rally to continue……

Dollar rises on concerns in the Euro Zone
The US Dollar Index (DX) gained a whopping 2% in the last week as uncertainty in the financial markets led to increased demand for the low-yielding DX. There is skepticism over the $1 trillion rescue package decided by the European policymakers. Risks relating to the implementation of the package remain and concern over public sector finances, and weakness in the banking sector could further hurt recovery in the 17-nation Euro Zone.
The economic situation in the Euro Zone remains grim and the European Central Bank (ECB) has started buying the region's government bonds. The ECB will have to keep interest rates low for a long time as stimulus measures in this time of debt crisis is of utmost importance. However, the impact of this fresh debt in order to pay off the earlier debt could prove harmful.
These debt woes in the Euro Zone have affected market sentiments and lead to risk aversion. This in turn has boosted demand for the DX which touched a high of 86.29 in the last week. The DX has found good support above 85 levels and consistent closing above this level is reiterating the concern regarding the issue in the Euro Zone.
Economic data from the US has come on the positive side and is also leading to gains in the currency. Initial jobless claims in the US fell by 4,000 to 444,000 in the week ended 8th May and reiterated hopes of a rise in interest rates in the US as positive data means progress on the economic front. The US Federal Reserve is expected to be the first amongst the major central banks to raise interest rates. This expectation will boost the dollar further in the coming week.
Risk sentiments remain subdued on economic woes
Appetite for risk and demand for higher-yielding and riskier investment assets has become restrained because of rising worries about the long-term implications of Euro Zone debt problems. The following problems will continue to drive the Euro lower which is currently trading at a 15-month low of 1.2352.
• Political and social unrest in the European countries.
• How will the heavily indebted countries in the Euro Zone get public finance under control?
• There are doubts over the ECB's new role of buying government bonds in the secondary markets to maintain liquidity and keep yields low.
• Fear of long-term inflationary pressures.
• Germany, the Euro Zone's biggest country will have to undertake cutbacks as it absorbs its share of the cost of the rescue deal.
• A cut in government spending and a rise in taxes in order to relieve debt problems.
Fundamental Outlook
Economic concerns in the Euro zone will continue to haunt sentiments in the financial markets. Mixed sentiments will continue to prevail as markets cope with two separate developments - 1) Positive US economic data and 2) economic worries in the Euro area. Economic data from the US is expected to be positive and that will help markets gain strength.
The trend in the US economic data in the last few weeks has been positive. We expect economic data from the US to come on the positive side in the coming week. If the data comes in as per expectations then it could boost hopes of a rise in interest rates in the US and lead to strength in the DX in the coming week. The DX will also gain on the back of existing economic worries in the Euro zone. Despite the rescue package of $1trillion to the ailing European countries, markets are concerned over the implementation and impact of the same in the long-term.
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