Expect the Greenback to Remain Strong

The dollar ended Wednesday's New York session near a 14-month high against the euro and an 11-month high against the yen. To many, the risks appeared increasingly tilted to the downside for the greenback. Indications of revived U.S. economic strength and expectations for more -- including a likely boost from the upcoming employment report on Friday -- have already been built into current levels, as have prospects for more Federal Reserve rate hikes.

The dollar's short-term vulnerability was reflected in the immediate aftermath of Thursday morning's news of the terrorism bombings in London. In early trading, the euro rose above the $1.20 level vs. $1.1928 late Wednesday while the Swiss franc gained about 1% vs. the greenback. Although the dollar did rally vs. the British sterling, "the speculative community was clearly long dollars coming into today's session, and this event has clearly forced out some of the late dollar longs," observed RealMoney.com contributor Marc Chandler. "But unless the market concludes that the Fed's monetary tightening cycle will be interrupted by the impact of today's event, the dollar will likely regain its footing."

Indeed, little appears to be in the way of the dollar remaining strong in the near term and the greenback was on the comeback trail by midmorning; in recent trading, the euro was trading at $1.1938.

"The Fed's tightening cycle still seems intact after today's attack in London. Financial incentives, like the relative and absolute level of U.S. interest rates and the shape of the yield curve, favor additional dollar gains," Chandler commented in RealMoney.com's Columnist Conversation. "Today's euro high is likely to take on psychological significance and probably denotes the upper end of its trading range. As the situation in the U.K. becomes clearer, further dollar gains are likely. "

Not surprisingly, then, worries about the dollar's ongoing bite into corporate profits are mounting. As the market prepares for the second-quarter earnings season, those concerns have topped the impact of higher energy costs, says Barry Hyman, equity strategist at Ehrenkrantz King Nussbaum. "It's becoming a major concern." (Granted, crude's record close on Wednesday was a big factor in the stock market's decline.)