Outlook 'extremely uncertain' for currencies

July 1, 2011: 2:09 PM ET
The dollar is in for a bumpy ride.

Click chart to track currencies.

NEW YORK (CNNMoney) -- Strap in and prepare for some turbulence.

After rising steadily against the dollar in the first four months of the year, the euro hit a rough patch in May and June. And that type of head-snapping action is likely to continue.

Why? Well, because the events that rocked the market -- the Greek debt crisis and patchy U.S. economic data -- are likely to stretch into the third quarter, if not beyond.

"The outlook is extremely uncertain," said Brian Dolan, chief currency strategist at Forex.com. "Nobody is talking about stimulus. Everybody is talking about austerity. Where is the juice going to come from to move things faster?"

In the months leading up to May -- when things started to go sideways -- the Greek debt crisis was thought to be relatively contained, and the domestic economy showed steady, albeit tepid, signs of growth.

But then things fell apart. It became apparent that Greece would need another bailout. Economic data both in the United States and abroad indicated a broad slowdown in growth. And the fallout from Japan's earthquake and tsunami continued to disrupt supply from one of the world's largest economies.

The elevated level of uncertainty sent the dollar on a roller coaster. The euro weakened against the greenback at the start of May, falling from $1.48 to $1.40 before rebounding to $1.47 in the first week of June.

Dolan said the trend is likely to continue, and that he expects a lot of sideways movement in major currencies to start the third quarter.

"The Fed is not raising rates. Job growth is not sufficient. There is very little reason for the dollar to see any kind of sustained strength," he said.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, had a more optimistic outlook.

"There is always a lot of uncertainly," he said. "And now Greece is not quite at the edge of abyss it was two weeks ago."

Is China dumping U.S. assets for euros?

Chandler said he expects lower oil and gasoline prices, the waning of Japanese supply troubles and lower interest rates to lend support to the U.S. economy in the third quarter.

But the dollar might not move much because the recovery won't be robust enough for the Fed to change course in the near term, he said.

But analysts agree there is still a cloud hanging over global markets. Manufacturing activity in China is slowing, and the eurozone debt crisis just won't go away.

"Ireland, Greece and Portugal have not been solved," Dolan said. "The debt crisis will not be solved in the next several months, or even years."

And while Portugal's economy is relatively small, Dolan said that Spain and Italy, which both have much larger economies, will grab more eurozone debt headlines in the third quarter.

Buckle up. To top of page

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