Thursday December 16, 2004 - 11:21:21 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar financing fears
The weak capital account data will expose the US currency to further selling pressure on fresh doubts that the US will be able to attract sufficient capital and fears will increase further if the current account deficit is above US$175bn. Yield considerations will offer some protection to the dollar and there will be some caution over selling the dollar aggressively. Fund managers also consider that the dollar is closer to fair value. Despite these positive factors it will be difficult to prevent an attack on fresh Euro highs against the dollar.
The dollar remained on the defensive for much of the past 24 hours, undermined by persistent fundamental concerns. The dollar weakened to a low of 1.3440, but the Euro struggled to sustain a move above 1.3420.
The US Treasury capital inflows report recorded net inflows of US$48.1bn for October compared with expectations of a US$55bn deficit and down from US$67.5bn the previous month. The gross inflows into the US were reasonably encouraging with a net inflow of stocks for the month. There was, however, an increase in US investment flows overseas to US$15.2bn, the highest figure since July 2000. This will increase fears that dollar weakness is encouraging capital flows out of the US and this will increase the threat of self-reinforcing weakness for the US currency. The capital flows report will increase concerns over the financing position and will reinforce the importance of the current account data today, especially as the capital inflows figure was less than the trade deficit for the first time in over 12 months. Another bad figure of US$175bn or more for the current account would further undermine dollar sentiment.
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