Friday October 29, 2004 - 10:05:31 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar correction complete?
The dollar's inability to sustain a rally yesterday is likely to reinforce negative sentiment and there will also be some disappointment that the US currency has failed to benefit significantly from lower oil prices. The underlying dollar trend looks to be for fresh losses due to growth and financing fears. A covering of short dollar positions could offer some relief, but there is an increasing risk that the 1.29 level will be attacked early next week, especially if US presidential opinion polls are still deadlocked.
The markets were volatile on Thursday, with investors unsettled by Chinese developments as the Chinese central bank increased interest rates for the first time in nine years. This caused a sharp sell-off in commodity currencies and the closing of these long positions against the dollar resulted in a rally for the US currency. The dollar rallied to a high of 1.2640 against the Euro, but it was unable to hold this position and it weakened back to 1.2750 in New York. The Euro was holding close to 1.2750 in early Europe on Friday.
The Friday figures will be under scrutiny to assess whether the economy is slowing. There will be fresh concerns over the US economy if GDP today growth is significantly below 4.0%. The inflation indicators in the GDP report will be closely watched as well. Low inflation would make it easier for the Fed to justify a pause in interest rate increases after a probable November rate hike and this would tend to weaken the US currency.
The comments from the ECB did not suggest major alarm over the Euro's gains with monetary sources stating that there will be no intervention unless market moves become more extreme. This suggests that intervention is very unlikely below 1.30 and this will increase the potential for the markets to challenge Euro highs towards 1.29.
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