Wednesday October 20, 2004 - 10:01:39 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar confidence sours
Dollar sentiment is likely to remain weaker initially, primarily due to fears that the US will find it difficult to finance the current account deficit. Political factors are also likely to be more important with the markets concerned that a disputed election result or a Kerry victory would weaken the US currency. The convincing move above 1.25 has also reinforced momentum towards a stronger Euro and there is likely to be a move towards 1.2650 before a significant dollar correction.
The Euro recovered from a brief dip below 1.2460 and consolidated its position above 1.25 in New York on Tuesday. The dollar was unable to make a significant recovery and it weakened to 1.2580 against the Euro in early Europe on Wednesday as dollar sentiment remained negative.
Dollar sentiment has remained generally negative, primarily due to deficit-financing issues after Monday's capital account data and poor trade data last week. The decline in private inflows has unsettled investors and the Wall Street performance will also cause some concern. At present, the market appears more focussed on the US structural weaknesses than the level of interest rates and this illustrates the decline in dollar confidence.
There will be concerns over the presidential election result as a disputed result or a victory would be likely to unsettle the US currency given that markets tend to prefer a convincing margin of victory and a Republican win, at least in the very short term. The near-term caution over the political outlook will make it easier for markets to sell the US currency.
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