Monday May 17, 2004 - 10:11:40 GMT
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INVESTICA Ltd - www.investica.co.uk
Risk aversion hurts dollar
Key factors today:
The New York manufacturing index will be released today, but the week will be quieter on the economic front. In this environment, equity markets and security concerns will be more significant factors.
The US interest rate debate will remain an important factor, although the mood of risk aversion and equity market developments may be more important in the very short term, especially with limited economic data, and this will hamper the dollar. There will also be further speculation over a medium-term Euro bottom. The Euro is overbought on a very short-term basis, potentially triggering a move back to 1.1980, but 1.2120 could be within reach over the next 48 hours.
The dollar made a fresh challenge of resistance beyond the 1.18 level on Friday, but was unable to push through this level and weakened back towards 1.1880 in New York. Dollar losses escalated in early Europe on Monday with the dollar wakening to beyond the 1.20 level with a low of 1.2060. The Euro has continued to see strong support at the 1.18 level and this will reinforce speculation that it has hit a medium-term bottom. The Euro-zone economic data has remained slightly more encouraging with a 1.0% February industrial production rise.
There is still a clear case for the Fed moving to tighten policy, but the case for a June rate increase has not been strengthened and there will not be any additional short-term incentives to buy the US currency. Risk aversion will be important, especially with high oil prices and the killing of the Iraq Governing Council head today. The evidence suggests that the US currency is struggling on risk aversion after the initial positive impact has ended. A slump in the US stock market would reinforce near-term dollar concerns.
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