Thursday November 25, 2004 - 11:05:29 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar needs correction trigger
There is unlikely to be any relief from negative underlying dollar sentiment in the short term, with persistent concerns over the current account deficit and a switch out of dollar reserves by global central banks. The official comments on exchange rates will remain very important and there will also be a continuing focus on Asia. A lack of decisive comments from US and European officials will hurt the dollar and reinforce speculation that the authorities are happy to see the dollar decline. If, however, there are currency gains against the dollar in Asia, upward pressure on the Euro would be likely to ease.
The dollar remained under heavy pressure during Wednesday and it weakened to a fresh all-time low against the Euro of 1.3190. Activity declined in New York ahead of the US Thanksgiving Holiday, but the dollar failed to recover in early Europe on Thursday with a test of 1.32. Liquidity will be reduced by the US holiday today and Friday's trading will also be significantly reduced. There will be options-related dollar buying at 1.32, but the markets will want to take on this level. There will be some speculation that the central bank will take advantage of thin liquidity to push the dollar stronger and rebalance the market risk profile and this will lead to some caution over aggressive dollar selling at current levels.
Underlying dollar sentiment remains very negative due to persistent fears that the US will encourage a weaker currency to help ease the current account deficit. There will also be further speculation over a switch of dollar reserves into the Euro. The official remarks and actions on the dollar will remain the dominant short-term focus. There will be continuing speculation that global financial authorities have tacitly agreed to let the dollar decline. Another possibility is that there has been informal agreement to let Asian currencies appreciate. If this is the case, the upward pressure on the Euro should ease and this would explain the relative lack of concern within Europe.
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