Monday November 1, 2004 - 10:41:51 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: Political tensions increase
Underlying dollar sentiment is likely to remain weak and there is a high risk of a medium-term move to record lows against the Euro. The dollar will, however, rally if there is a decisive election result. The very high number of long Euro positions will also make it difficult for the Euro to extend gains in the near term, particularly if the US data is firm later today. Overall, the Euro is likely to be blocked around 1.2840 against the US currency in the short term with a possibility of at least a temporary move to 1.2550 later this week.
The dollar weakened to a low of 1.2820 in New York on Friday, but was slightly stronger than 1.28 in early Europe on Monday and the US currency subsequently rallied to 1.2750. The US presidential opinion polls remain deadlocked ahead of the Tuesday vote. The market's main fears are that there will not be a decisive result or that there will be a legal challenge to the result. If this can be avoided, there will be scope for a dollar rally, although substantial gains appear unlikely.
If the national ISM manufacturing figure is strong today, there will be greater optimism over the US economy. At this stage, a rate hike is still likely in November and the dollar will be vulnerable if there is no increase.
Official comments on exchange rates will remain very important. The comments from European officials do not suggest that there will be near-term heavy opposition to Euro strength. There is little chance of intervention unless the Euro pushes above the 1.30 level and quite possibly not until the 1.35 level provided that the markets remain orderly. The Euro-zone data remained weak with the PMI manufacturing index dropping to 52.4 in October from 53.1 in September.
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