Friday October 22, 2004 - 08:29:51 GMT
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INVESTICA Ltd - www.investica.co.uk
Weak dollar correction?
Growth and financing fears will certainly maintain dollar vulnerability, especially with uncertainty over the presidential election. There is, however, scope for at least a weak temporary correction back towards 1.2550 and Euro resistance should be tough at 1.2650 for now. The underlying market dynamics suggest that the US currency will weaken through 1.2650 before the US election, although there could then be a scope for a significant correction.
The dollar weakened to a low of 1.2650 on Thursday and sentiment towards the US currency remained negative, but the dollar managed to resist a decline through 1.2650 in New York and staged a mild corrective recovery to 1.2625 in early Europe on Friday.
The headline US economic data was stronger than expected with jobless claims falling by more than expected to 329,000 in the latest week from 354,000 previously. The October Philadelphia Fed index was also stronger than expected at 28.5 compared with 13.5 in September, but the employment and orders components were disappointing.
The US presidential opinion polls will continue to be closely watched. There will need to be a significant gap in Bush's favour to support the US currency even though futures markets are narrowly pricing-in a Bush victory. Continuing evidence of deadlock would tend to undermine the US currency. The latest tracking poll gave Bush a 1% lead, but the gap will need to be 5% or more to ease uncertainty and offer dollar support.
It still appears to be the case that European officials are welcoming Euro strength as an important brake on the inflationary impact of oil prices. Dutch Finance Minister Zalm, for example, mentioned that a firm Euro would counter the impact of high oil prices. The banks will be very concerned to avoid disorderly markets, but intervention looks a remote possibility at this stage.
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