DJ Forex Focus: Open Throttle For Dollar Rally

All the currency dials are turning dollar-positive.

U.S. data continue to point to recovery.

Contagion fears continue to stalk the euro.

Investor appetite for commodity and emerging markets currencies is on the slide.

And, if technical analysts are to be believed, a major break in the dollar's trade-weighted index earlier this week suggests even more upside momentum.

Over the last few weeks, data coming out of the U.S. have remained strong, suggesting the economic turnaround should soon start showing up in the jobs market.

If non-farm payrolls this Friday confirm this trend, then expectations for a Fed rate hike before the end of this year will only increase, fueling the support for the dollar that has been growing since the start of the year.

This week has brought another key element in the dollar success story--the Greek bailout.

As a national strike brought Greece to a halt Wednesday and rioting spread across Athens, there is surprisingly little confidence in financial markets that the Athens government will be able to deliver of the EUR110 billion rescue agreement. More spending cuts and greater austerity will hardly find much support among Greek parliamentarians--much less Greek citizens--just now and the threat of default is that much greater.

But of even greater concern is what is happening elsewhere as investors continue to pull out of other indebted euro-zone members--sending both their funding costs as well as the price of credit default swaps for insuring their debt steadily higher.

"No matter how much Portugal and Spain are said to be different from Greece, and they are, the market is not minded to discriminate at present, especially foreign investors," is how currency strategists at BNP Paribas described the current market mood.

An auction of EUR3 billion of five-year Spanish bonds later Thursday could prove a good barometer of investor interest.

For the euro, this all comes at the worst possible time.

This week, the single currency fell back under $1.30 for the first time in a year, taking its rate against the dollar back down to levels that could start worrying foreign reserve managers.

"It seems clear that with the break of $1.30 we are entering into some particularly sensitive territory for many long-term investors," said Simon Derrick, senior currency strategist with Bank of New York Mellon in London.

"It seems clear that these concerns will be put to the test. In short, what happens over the next few weeks could see some significant long-term levels being tested," Derrick added.

But the euro isn't the only currency that is likely to be shunned in favor of the dollar.

As investor appetite for risk has declined, so has their appetite for commodity and emerging market currencies. Sellers have become more persistent not only because of the general move out of risky assets but also because there are signs that China's efforts to slow its economy down are starting to work.

Even the yen, which once appeared to have an even higher safe-haven status than the U.S. currency, is being sidelined in favor of the dollar as worries about Japan's fiscal deficit and chronic deflation pressures start to undermine investor support.

It isn't surprising, therefore, that the dollar took off this week, with its index breaking through resistance at 82.71 and strong momentum taking it up to a nearly one-year high at 83.649.

The research team at The Royal Bank Of Scotland expressed the dollar-positive sentiment that looks set to prevail: "The dollar is shaping up as perhaps the only safe-haven currency at the moment. So let's suspend disbelief and ignore the U.S.'s debt problems and run with it. At least it has only one Federal Government and can coordinate its actions."

Early Thursday, the euro remained under selling pressure, especially after China expressed its concerns over contagion. The single currency fell to $1.2766 by 0645 GMT from $1.2816 late Wednesday in New York, according to EBS.

See the euro's latest fall against the dollar:

It was also down at Y119.27 from Y120.12, while the dollar slipped to Y93.40 from Y93.66.

The pound also came under pressure, falling to $1.5068 from $1.5103, as investors continued to adjust positions as the U.K. starts to vote in a general election that could bring a hung parliament. Latest opinion polls have suggested that as much as one third of the electorate remains undecided.

Bloomberg TNI FRX POV

   Reuters   USD/DJ    Thomson   P/1066 or P/1074 

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)