Monday October 18, 2004 - 10:59:36 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces crucial test
Confidence in the US economy will remain weaker in the short term, with increasing fears that high oil prices will damage growth prospects and deter further interest rate increases. If US growth and rate prospects are not attractive enough to attract sufficient capital inflows, the US currency will, therefore, be more vulnerable to selling pressure given the increased market fears over the trade deficit. The net risks suggest that dollar support around 1.25 will break, but not in the very short term.
The dollar failed to take advantage of a strong headline retail sales report on Friday and the dollar fell sharply in New York as support levels broke triggering technical selling. The other US data was generally unhelpful for the US currency. The Euro tested the 1.25 level for the first time since March and the dollar remained weak at 1.2475 in early Europe on Monday.
The key difference over the past few days is that markets are less confidence that US growth optimism will offset the underlying structural weaknesses and there are increased fears over a financing shortfall. In this context, the monthly Treasury report will be important for the US currency. A slowdown in capital inflows would reinforce fears that US capital account trends will weaken the US currency.
Markets have been desperate to break out of narrow ranges over the past few weeks and this will increase near-term dollar risks as momentum players will want to sell the US currency. There will also then be the risk of a sharp Euro retracement later in the week as the Euro is likely to become overbought.
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