Friday December 10, 2004 - 11:15:53 GMT
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INVESTICA Ltd - www.investica.co.uk
Correction to meet selling pressure
The corrective phase for the US currency is likely to continue in the short term. There will still be the pressure to ease back on short dollar positions which will expose the Euro to selling pressure. There is still a high risk of dollar selling on any significant rallies, especially from longer-term players and central banks. The dollar will, therefore, struggle to sustain rallies despite the possibility of a short-term move to at least 1.3120.
The markets have remained in a consolidation and correction phase over the past 24 hours with the dollar finding support close to the 1.3350 level and strengthening back to 1.3250 in early Europe on Friday. The dollar managed to extend gains to 1.3170 later in Europe as wider dollar corrective pressures continued.
There will still be expectation of a US Federal Reserve interest rate increase next week to 2.25% and this would push short-term US rates above Euro rates for the first time in three years. The US Fed increase will, therefore, lessen the US dollar's short-term yield disadvantage. Longer-term yields have also moved into the dollar's favour. This yield shift will reduce dollar selling pressure in the short term and will also increase the potential for a covering of short dollar positions.
The underlying dollar selling pressures are liable to continue with long-term investors and central banks looking to reduce dollar holdings on any significant rallies. This is likely to limit the dollar rally, although sharp US currency gains should not be ruled out as long Euro positions are stopped out.
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