Wednesday December 8, 2004 - 11:17:13 GMT
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INVESTICA Ltd - www.investica.co.uk
How far will the dollar correct?
Interest rate trends will be significant with the US set to increase rates next week while the dollar weakness is restraining interest rate increases elsewhere. The dollar is also due for a further initial correction with short-term players keen to lock in profits ahead of the year end. Overall, there is scope for a further near-term dollar corrective move stronger, but there will be the threat of renewed longer-term selling pressure at 1.3250.
The Euro failed to capitalise on the push to fresh record highs on Tuesday and the US currency managed to secure a correction back to 1.330 in early Europe on Wednesday. Oil prices have weakened again with prices below US$42 p/b in New York. The drop in oil prices should be a small net positive for the US currency in the short term.
There has been no evidence of official intervention, but it is certainly possible that the European banks have been quietly intervening to encourage a dollar correction. Markets will also watch the banks very closely today. Any move to intervene while the dollar is correcting would signal a determination to amplify the dollar move stronger and this could trigger a big dollar correction stronger. The more likely outcome is that there will be no official intervention at this stage.
Underlying dollar sentiment will remain weak with further concerns over the current account deficit and a switch out of dollar reserves. The US budget trends will also be important, especially as the congressional budget office has reported that the budget deficit for November was close to US$57bn compared with US$43bn the previous year.
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