We would be astonished if the euro were to fall!

Outlook: The evolving sentiment is that growth is about to get quite scary in the eurozone, even Germany, as well as Britain. It’s already under severe threat in the US, but the US is famously more resilient and flexible, so that if we do get a global recession, the US will be the least damaged and first to come out of it. This is the only basis on which a US Dollar can be seen to be “real” or to have a reasonably sound basis. The problem is that it implies capital flight into the dollar as a safe haven, and that means a certain degree of hot money that can just as quickly and easily flow right back out.

On the data calendar, tomorrow’s pending home resales (contract signings) probably fell 2.5% in May, according to Bloomberg. The data is a leading indicator of actual home sales. Forecasters are busy predicting how much farther home sales and home prices can fall. In the UK, which the US is following, the estimates are for 12-15% more price declines this year and next.

On Friday we get the trade report for May, probably a rise in the deficit to $62.4 billion, according to the Bloomberg survey, or the widest in almost two years. Exports have been a bright spot contributing to growth, but that tends to get ignored when the deficit is widening. At the same time we get the import price index, probably a rise by 2% in June, led of course by oil.

The Fed is inclined to downplay the effect of import prices on overall inflation, but that doesn’t mean inflation expecta tions are not fed by higher prices for socks. Also on Friday we get the preliminary University of Michigan July consumer sentiment index, which clearly will be a bummer.

The big event this week is institutional rather than data-driven. Bernanke and Paulson will speak at something named the FDIC Forum tomorrow. They also testify at the House Financial Services Committee (Thursday), which is spending some time on reining in credit card abuses. It’s always possible one or the other of them will say something of interest to FX traders. Paulson has been pushing a regulatory mode based on “principles” rather than exact, specific regs for every little thing. We say the implication is that we no longer have principles and somebody has to tell us what they are, which in turn implies we really do need exact, specific regs for every little thing.

Barring an unforeseen disclosure, we have little faith in the dollar rally. A sustainable rally needs a few things that are missing, like falling oil prices, a narrowing yield differential or even (golly) a positive one, and confidence in the US “dollar policy.” Since the US doesn’t actually have a dollar policy, can’t control the price of oil and is unwilling so far to take the monetary policy actions necessary to lift the long end of the yield curve, the current dollar rally is built on air. Looking at it from the other side is a little more promising.

All the commentary on the UK, for example, is negative. Japan’s outgoing capital flow has no end in sight, modest increases in domestic inflation notwithstanding. As for Europe falling into recession and staying there, it’s still a maybe. What’s potentially most interesting is a wholesale loss of interest in the top emerging markets, specifically China, once the Olympics are over and lots of westerners get to see conditions on the ground. China is rushing as fast as humanly possible to tart up the place and it will restrict travel outside the zone of the games, but never mind—we will get plenty of reports.

We expect the dollar rally to be short-lived but want to know how far the correction can go. Two obvious spots to watch are the last intermediate low, 1.5469 from June 23, and the one before that, 1.5303 from June 13, which formed a double bottom with the low before that, 1.5284 on May 8. We would be astonished if the euro were to fall to that double bottom low and so we name the worst case scenario at 1.5275, but more likely a much higher level.