Saturday December 18, 2004 - 12:09:00 GMT
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INVESTICA Ltd - www.investica.co.uk
Big positioning shift
The growth trends should offer some dollar support, especially as there is the potential for a further widening of interest rate differentials in the dollar's favour. The current account figures this week were not as bad as expected, but the underlying trends are still worrying and structural dollar vulnerability will continue. Overall, there is a greater chance of two-way trading around current levels with the dollar offering sufficient value for the Euro to struggle to sustain moves much beyond 1.35. Given the positioning shift, the dollar will find it very difficult to make strong progress.
The dollar recovery stalled early in the weak and it weakened back to a low of 1.3430, but the US currency rallied sharply on Thursday, helped by better than expected current account data. There were also rumours that the ECB checked prices, but no sign of actual intervention. The IMM positioning figures were very important as there is now a net short position on the Euro for the first time in over three years after a big shift over the past week. This will make it much more difficult for the dollar to secure a further significant rally.
The level of short-term interest rates is above equivalent Euro rates for the first time in over three years and this will offer some dollar protection. In particular, there will be a greater reluctance to sell the dollar aggressively as part of carry trades. Growth figures remained generally encouraging with retail sales rising 0.1% in November after a 0.8% October increase while there was a sharp drop in jobless claims. The Philadelphia index also strengthened to 29.1 in December from 20.7 the previous month. Firm growth indicators will offer some dollar support, especially in the industrial sector, although high consumer spending will also raise concerns over the current account.
The US external financing requirement was a major issue during the week. The capital inflows were weaker than expected at US$48.1bn after a revised 67.5bn for September. There were inflows into the equity market and the level of inflows overall was comfortable. There was, however, an increase in capital outflows with investment overseas the highest since July 2000. This will increase fears that the weak dollar will trigger capital outflows and could reinforce a negative cycle for the US currency.
The third-quarter current account data was better than expected at US$164.7bn after a revised US$164.4bn for the second quarter. The US also managed to retain a surplus on investment income while direct investment inflows were positive for the first time in three years.
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