Wall Street Journal, By NICOLE HONG
The euro's direction in the coming week will hinge on whether the European Central Bank decides to respond to the currency's recent strength. Currency traders will be paying close attention to the ECB's monthly policy statement on Thursday for any mention of the euro, which has jumped against the dollar since the start of the year. Investors have become increasingly optimistic about credit conditions in the euro zone, especially as the likelihood of catastrophic events like a Greek exit get priced out.
However, concerns are mounting that the euro's recent strength may cripple the euro zone's economic recovery. A more expensive euro makes European exports less attractive to overseas buyers, hurting their competitiveness. Several companies, including Europe's largest semiconductor maker, STMicroelectronics NV, STM +5.21% have already warned that the strong euro poses a risk to their future earnings.
On Friday, the euro jumped above $1.37, its strongest level against the dollar since November 2011.
"The euro's had a massive move higher, and we're waiting to see whether there's going to be some ECB comment on how the currency impacts growth," said Jens Nordvig, global head of currency strategy at Nomura Securities in New York.
The euro's recent strength could quickly unwind if ECB President Mario Draghi says in his postmeeting news conference that the strong euro is weighing on growth. "He's normally quite careful not to comment directly on the currency," Mr. Nordvig said.
The euro was at $1.3641 late Friday in New York, up from $1.3578 late Thursday, while the dollar rose to ¥92.82 from ¥91.72.
Investors will also be closely watching activity in the U.K. pound. Incoming Bank of England Gov. Mark Carney, who is currently the Bank of Canada's head, will appear Thursday before the British Parliament's Treasury Select Committee for a hearing on his monetary policy outlook. Mr. Carney takes over at the BOE on July 1.
If Mr. Carney expresses his desire to move the U.K. away from its hard 2% inflation target to a 1% to 3% band, that could "spur markets to price in additional future BOE easing" and prompt another pound selloff, say Citigroup C +2.04% analysts.
The pound has already fallen more than 3% against the dollar in the past month, hurt by weak economic data and expectations for monetary easing later in the year. The Bank of England also issues its monthly policy statement on Thursday, where no policy change is expected. Late Friday, the pound was trading at $1.5691, down from $1.5858 Thursday.
Meanwhile, the Reserve Bank of Australia is having its first rate-setting meeting of the year on Tuesday. Analysts generally expect the RBA to hold rates unchanged at 3%, but some say low fourth-quarter inflation gives the central bank scope to cut rates by another 0.25 percentage point.
"The low inflation really unties the RBA's hands to do a little bit more to support the Australian economy," said Vassili Serebriakov, currency strategist at BNP Paribas BNP.FR +1.18% in New York, which is calling for an RBA rate cut. However, even if the RBA reduces rates, Mr. Serebriakov says he expects a minimal impact on the Australian dollar because Australian retail-sales and employment data later in the week should show an improvement from the previous month.
The U.S. data calendar is light in the coming week. A reading of economic activity in the nonmanufacturing sector in January comes out Tuesday, while the December trade balance is released Friday.
