Thursday December 2, 2004 - 10:41:08 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar due for a correction
Central bank policies will be an important short-term focus and dollar selling will tend to increase if there is no ECB backing for intervention. The markets are increasingly ignoring positive news for the US dollar. Although this illustrates deteriorating underlying dollar sentiment and fears over capital flows from the US, it also increases the risk of sharp correction. The markets may want to challenge the 1.35 level, but dollar selling looks very dangerous at current levels.
The dollar hit a new low of 1.3375 in late New York. The dollar remained weak in early Europe on Thursday before a slight rally to 1.3345.
The US data was generally stronger than expected with the ISM index for the manufacturing sector rising to 57.8 in November from 56.8 in October. There were also significant gains for the orders and employment sectors which will boost optimism over the Friday payroll report. The Fed Beige Book also reported that the economy continued to expand in November with a stronger labour market and rising lending. This report, coupled with the speech from Fed Governor Yellen, makes a further fed funds interest rate increase likely in December.
The combination of yield spreads at a four-year high in the dollar's favour. The fact that the dollar is still weakening illustrates the general lack of confidence in the US currency. If the markets continue to ignore the positive US fundamentals, there will be an increased risk of a sharp dollar correction.
The comments from ECB Chairman Trichet will be closely watched after the ECB rate decision. If the central bank officials downplays the potential for intervention and appears comfortable with Euro gains, there will be the risk of increased dollar selling.
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