Tuesday October 26, 2004 - 09:55:37 GMT
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INVESTICA Ltd - www.investica.co.uk
Limited dollar correction
There have not been any aggressive comments from Japanese officials suggesting that the Japanese might intervene which will tend to encourage dollar selling. There is, however, the potential to defend the 105.0 level an the dollar is also oversold which will offer some immediate relief. The dollar needs to recover back above 107.0 to secure a more substantial rebound towards 108.5 and failure would encourage a fresh test of 106.2.
The dollar weakened to a low of 106.2 before a slight recovery to 106.7 in Europe on Tuesday. The US currency retained a slightly firmer tone in early Europe on Tuesday at 106.8, but was unable to challenge the 107.0 level.
Japanese officials gave expressed some concerns over the yen appreciation with official Watanabe stating that Japan would act if the dollar falls too fast, but they still do not appear alarmed at present. Finance Minister Tanigaki, for example, attributed the move to dollar weakness rather than yen strength and this will lessen the potential for intervention. There will be some speculation that there could be intervention after Wednesday as the trades would not show up until after the US election, although it is more likely that the authorities would prefer to encourage private and institutional dollar buying as a first step.
There is likely to be speculation over a regional currency revaluation with the possibility that G8 members agreed last month to let the dollar depreciate against Asian currencies. In this context, Chinese policies will be crucial and, although a yuan revaluation remains unlikely, there is some potential for the yuan to be given greater flexibility.
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