Tuesday December 28, 2004 - 10:59:10 GMT
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INVESTICA Ltd - www.investica.co.uk
Caution required over dollar selling
Underlying dollar sentiment will remain weak. The ease in breaking dollar support levels will also reinforce negative sentiment and increase the chances that the markets will push the dollar weaker and try to trigger stop-loss dollar selling. The chances of ECB intervention still look low in the short term, especially as there has not been a clear build up in short dollar positions, although concerns will start to increase and verbal intervention may be stepped up to discourage a quick move towards 1.40.
The dollar has remained on the defensive throughout the Christmas period and the US currency weakened to a low of 1.3640 against the Euro during Monday. The dollar was unable to make any significant recovery in Europe on Tuesday, trading close to the 1.3620 level before dipping to 1.3640.
There are further market concerns over the US budget and current account deficit positions and this will leave the dollar vulnerable to selling pressure. The markets have been successful in triggering stop-loss and option-related dollar selling over the past few days and there will be a temptation to continue with this strategy in the short term.
The comments from European officials will be closely watched in the short term. Expectation of intervention have faded, especially after the comments from Dutch Finance Minister Zalm who stated that the Euro had appreciated within acceptable limits. There will be a range of opinion within Europe and there will certainly be much more serious concerns if the Euro pushes above the 1.40 level. The chances of success will still be low without US backing and the G7 ministers in early February may become a major market focus earlier than would normally be expected to see if there are measures to support the dollar.
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