Thursday November 18, 2004 - 11:07:23 GMT
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INVESTICA Ltd - www.investica.co.uk
US stance hurts dollar
There will be further speculation that no measures to support the dollar will be taken at or after the weekend G20 meeting. There will also be speculation over divisions between the US and Europe. These factors will keep the dollar on the defensive initially and the markets will tend to ignore firm US data given the focus on the US current account deficit. Actual intervention is unlikely, but Europe is likely to step-up verbal intervention. The dollar is liable to weaken further in the short term and markets will want to target 1.32, but there is an increasing risk of a sharp correction, especially if US data remains strong.
The dollar remained under pressure during Wednesday and weakened to a low of 1.2045. The dollar was unable to gain any relief in Europe on Thursday, dipping to a further low around 1.2070 and a fresh 9-year low on a trade-weighted basis before a slight recovery.
Dollar sentiment remains weak and the official comments on exchange rates will remain very important. The statement by US Treasury Secretary Snow repeated his normal comments over the US preference for a strong dollar. The other remarks were, however, significant with Snow calling intervention efforts at best non-rewarding. This will reinforce expectations that the US will not back efforts to curb dollar weakness and will not support European efforts to restrain the Euro.
There are also evidence of divisions between the US and Europe and this will tend to destabilise the dollar. Europe wants the US to support the underlying dollar outlook by taking action on the US budget deficit. The US wants Europe to boost domestic demand to help improve growth prospects and narrow the US trade deficit. The G20 meetings starting on Friday will be important for the markets. If there is any evidence of tensions between Europe and the US, the US currency will be subjected to further downward pressure next week.
The markets are increasingly focussing on official exchange rate policies and are tending to ignore anything else. Although this could continue initially, it will also set up the potential for a sharp correction within the next few weeks, especially if US data remains robust.
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