Friday December 17, 2004 - 09:58:20 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar fundamentals still weak
The current account data offered some immediate relief to the US currency, especially as direct investment was positive, but the underlying trends are still a major concern and there will still be the high risk of underlying selling pressure on the dollar. The price action yesterday suggests that the Euro will hit very tough near-term resistance on moves back towards 1.35.
The dollar found support at the 1.3420 level against the Euro and the US currency gained strongly in New York. The dollar rallied to a high of 1.32, but had weakened back to 1.3260 in early Europe on Friday before sliding to 1.33.
The initial trigger for dollar gains was the current account deficit which was lower than expected at US$164.7bn compared with expectations of US$170.0bn. There was some protection from the investment account as the US managed to secure a US$6.7bn investment income surplus. There will also be some optimism over the direct investment figures which were positive for the first time in three years. Although the data was slightly better than expected, the figure was still alarming and did not justify a sharp dollar rally. The reaction suggests that the market was over-extended on short dollar positions, with pressure to cut positions increased by unease over a decline in liquidity over the next week.
The US growth data was stronger than expected with the Philadelphia Fed index strengthening to 29.6 in December from 20.7 the previous month. The orders component was stronger, but the employment index was slightly weaker. Jobless claims fell sharply to 317,000 which will restore some optimism over the employment market, but there was a sharp drop in housing starts. The net bias should offer some dollar support and a strong consumer price figure of more than 0.3% today would be likely to reinforce expectations of a February Fed rate hike.
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