Monday December 6, 2004 - 11:02:34 GMT
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INVESTICA Ltd - www.investica.co.uk
European dollar defence?
The weaker than expected US payroll figure will damage dollar confidence in the very short term. With the US currency already under pressure from current account fears, any doubts over growth will further damage the US currency as it will be more difficult to overcome selling triggered by structural weakness. The Fed is, however, likely to increase interest rates next week and there is the potential for the European banks to boost dollar demand through a careful targeting of orders.
The dollar was undermined by weaker than expected US employment data. The payroll growth was held to 112,000 in November compared with expectations of a 180,000 increase and the figure for the previous two months were also revised down by over 50,000. The figure will dampen optimism over the US economy, although the data overall has still been favourable. The dollar weakened to a low of 1.3450 and was struggling to secure more than a small rebound in early Europe on Monday.
The most likely outcome is that the Fed will still decide to increase interest rates at the FOMC meeting next week with a 0.25% increase to 2.25%. This would push dollar rates above Euro rates and would remove one negative factor that has undermined the US currency. There will still be a lack of confidence in the US currency and a rate rise may not be enough to reverse near-term dollar weakness, although the yield attractions will be significant in the medium term.
The official comments on exchange rates will remain an extremely important focus. The European officials at the ECOFIN meeting today are likely to voce concerns over the Euro's strength and rhetoric will probably be stronger than the past two weeks. There is unlikely to be official commitment to intervention and there is also very little chance that the European banks will seek to defend a specific level.
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