Thursday November 11, 2004 - 11:14:08 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar aims for further correction
The potential for further interest rate increases from the Fed will offer the US currency some support especially as it will start to deter carry trades using the US dollar as a funding currency. The lower trade deficit will provide some initial relief, but the underlying current account concerns will persist and overall dollar sentiment will remain weak. Overall, the dollar correction needs to extend beyond 1.2850 to bolster confidence in a more extensive technical recovery. The chances of this have increased slightly, but there is likely to be a fresh challenge on all-time dollar lows once the current correction has been completed.
The dollar briefly weakened beyond the 1.30 level during Wednesday to a fresh all-time low, but the Euro quickly retreated from this level as further buying failed to develop.
The US trade deficit was slightly better than expected with the monthly deficit declining to US$51.6bn from US$53.6bn the previous month. The figure will offer some near-term relief, especially as it is likely to lead to an upward revision to third-quarter GDP data. There will still be underlying unease over the trade and current account deficits and they will still a major potential source of dollar weakness unless there are more convincing arguments for the markets to ignore them.
As expected, the US Federal Reserve increased interest rates by 0.25% to 2.0%, the fourth increase since June. The statement was the main interest and the Fed commented that policy was still accommodative. The Fed also retained the statement that it expects monetary accommodation can be removed at a measured pace. These comments suggests that the Fed is looking to increase rates again in December. A further rate increase would be significant for the US currency as it would push rates above the Euro-zone level for the first time in over two years.
The comments from European officials will remain very important. ECB official Almunia stated that he was worried over Euro strength and the comments from officials today will be closely watched, especially as chairman Trichet will speak. There were also reports of intervention on Wednesday which unsettled the Euro, although this appears unlikely at this stage with officials taking about co-ordination rather than intervention.
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