Monday November 8, 2004 - 11:08:09 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar needs official backing
Dollar sentiment will remain very weak in the short term with further unease over the budget and current account deficits. The US currency will gain some support from potential Fed interest rate increases in December as well as November. The comments from ECB officials will be very important in the short term. There is unlikely to be major concern over the Euro's level until near 1.35, but some warnings are likely to prevent even more aggressive dollar selling.
The US payroll report on Friday was stronger than expected with an increase of 337,000 in October after an upwardly revised 139,000 increase in September. The US Federal Reserve will meet on interest rates this week with a decision on Wednesday and there is a strong chance of an increase in the Fed funds rate to 2.0% from 1.75%. The comments on future policy are likely to be very important for the US currency and there will be greater expectations of a December rate increase following the strong employment report. Given that markets have recently downgraded expectations of a rate increase in December, any shift back to expecting and increase would help underpin the US currency. The dollarís inability to rally on Friday is still potentially very damaging.
The comments on exchange rates from central banks will be closely watched in the short term. The G10 central bank officials are due to meet today and comments from the officials will be closely watched. The principal focus for the markets will be the ECB comments and if the ECB does signal concern over Euro strength, there will be a greater potential for a dollar rally. Actual intervention looks unlikely before 1.35.
The latest IMM data recorded a further sharp increase in long Euro positions of around 8,000 in the latest week, pushing the net long positions to over 53,000. This will make it more difficult for the Euro to extend short-term gains and raises the possibility of a sharp correction.
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