Monday November 29, 2004 - 12:07:54 GMT
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INVESTICA Ltd - www.investica.co.uk
Weak dollar correction
There is little immediate prospect of an improvement in underlying dollar sentiment with fears over a switch in reserves out of the dollar. Given the universal bearish dollar sentiment and high number of speculative dollar positions there is, however, the potential for at least a temporary correction. The magnitude of the correction will be much bigger if the central banks decide to intervene, although on balance this is unlikely.
The dollar failed to sustain a move through 1.32 on Friday and weakened back to 1.3280 in New York as underlying sentiment remained bearish. The dollar regained some ground in early Europe on Monday with a move to 1.3240, but was still struggling to gain any significant buying interest.
Underlying market sentiment towards the US currency remains very weak and there is little prospect of a near-term improvement. There will be further unease over the current account deficit and a potential shift in reserves away from the US currency after the comments from central banks last week. There will also be the suspicion that the global authorities will welcome a weaker dollar to help curb trade imbalances. The dollar is, however, over-sold on a short-term basis and there will need to be at least a limited correction. The central banks also need to avoid a destabilising escalation in selling pressure.
The economic data will be more important this week with vital data releases from the US. The payroll data in particular will be very important at the end of the week. A weak figure would further erode dollar confidence while a strong figure would reinforce optimism over the US economy and could force some reassessment of dollar sentiment.
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