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The worst may not be quite over yet for the US dollar and weaker Asian units

The US dollar has managed to hold up pretty well over the past week, despite warning sounds about the US economy from the US central bank’s policy-makers, but it could be a little too early to sound the all-clear just yet. True, better than expected US jobs numbers for April helped to force the euro to a five-week low and have helped propel the greenback to two-plus month highs versus other safe-refuge favourites like the yen and Swiss franc too.

And, on the equity front, Wall Street did its part too, extending gains modestly and helping to bring back some risk appetite for carry trades - thus lifting the Australian and New Zealand units versus the yen.

Die-hard US dollar bears will however continue to warn that the worst surely cannot yet be over if oil prices are going to carve out new peaks. At the London open yesterday, both Brent Crude and US light crude for June 2008 delivery soared to fresh highs of US$119.07 and US$120.68 respectively.

The biggest danger here, as we’ve previously explained, is that we have a vicious circle where higher oil prices cause - and are also caused by - a falling US dollar.

At the same time, we must tell readers that currency traders have also been picking out the potential Asian winners and losers, just in case oil keeps going - especially with one US house reportedly predicting prices soaring as high as US$150 to US$200 per barrel.

On Monday this week, the US dollar scored a fresh 2008 high of 42.45 Philippine pesos. Yesterday, the greenback clocked a fresh eight-month high of 40.97 Indian rupees. And along the way, other notable Asian victims of soaring oil prices were the Indonesian rupiah and South Korean won.

Admittedly, market moves may have been more exaggerated because of holiday breaks. Japan properly returns to work only today, after a break that started as far back as last Tuesday, April 29.

But here’s what it appears to come down to. The worst of the US credit crisis may be over, thanks to timely Fed rescue operations. However, as the Fed and Warren Buffet have continued to warn over the past week, the real US economy is not necessarily out of the woods yet.

Investors are warned the real US economy is not necessarily out of the woods yet.

What does this mean in currency terms? In terms of the majors, it would appear that for as long as Wall Street continues to do well, the US dollar has some potential to hold up - if not go the same way - especially against a currency like the Japanese yen. And perhaps to a lesser extent, weaker units like the Sterling pound as well.

In actual numbers, we could, for example, propose that the US dollar may be able to keep its nose clear of key support around 102.5 to 103 yen for as long as benchmark Wall Street indices like the Dow Jones Industrial and the S&P 500 can stay on the right side of 12,800 and 1,400 respectively.

Closer to home, however, raging oil and food prices will affect different Asian currencies in different ways. On the one hand, those who suffer large trade deficits - like India and the Philippines - are more likely to see their currencies soften as they are forced to pay more and more for imported food and energy.

On the other hand, those with healthy surpluses - such as China, Singapore and Malaysia - have had to let their currencies appreciate faster versus the US dollar in order to reduce the impact of imported price pressures. Essentially, this makes it cheaper to pay for imported food and oil priced in US dollars.

Consider the following: India chalked up a US$75 billion trade deficit over the past 12 months, while China accumulated a US$256 billion surplus. In big picture terms, this would at least partly help to explain why the greenback has risen more than one per cent in rupee terms over the past week, but has barely budged in yuan terms over the same time frame.

Source : Business Times - 07 May 2008