Tuesday December 14, 2004 - 11:11:22 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar reaction vital
The Fed is likely to increase interest rates by 0.25% and signal a continued gradual tightening in the first quarter of 2005. The yield trends will offer some support to the US currency and reduce the risk of speculative selling. There is also the risk of underlying selling pressure on the US currency which will offset the potential for a covering of short speculative dollar positions. The dollar will also be sold if the Fed does not increase US rates.
The dollar was unable to maintain momentum during Monday, stalling at 1.3250, and the US currency weakened back towards 1.33 with a low of 1.3320 before a slight recovery in early Europe on Tuesday.
The US events today will be very important. The markets remain very concerned over the underlying trade position and the dollar will, therefore, be vulnerable if there is a bad trade account figure. Market expectations are for a deficit of around US$53.0bn and a deficit above US$54.0bn would be likely to unsettle the dollar. Markets will also be looking for export data to assess whether dollar weakness is starting to have a positive impact on shipments. The decline in oil prices since October's figures should ease fears over the oil deficit slightly.
The US Federal Reserve will announce its interest rate decision at 19.15 GMT. There is a very high probability that the Fed will decide on a 0.25% rate increase which would take the Fed funds rate to 2.25% compared with Euro rates of 2.0%, the first dollar premium for over three years. The yield trends should at least help stem selling pressure and reduce the risk of the dollar being sold to finance carry trades.
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