Thursday December 30, 2004 - 11:18:14 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro buying on dips
Underlying dollar sentiment will remain weak and there will be speculation over aggressive dollar selling early in January. There is also likely to be underlying Euro buying on dips. In particular, any near-term dollar recovery through 1.35 is likely to be met by selling pressure. There will be speculation over a move towards EUR1.40/US$ in January, but caution is required due to low liquidity and the very negative dollar sentiment is a warning sign that dollar selling may be exhausted.
The dollar found support at 1.3645 against the Euro and strengthened to a high of 1.3560 during Wednesday, but the US currency was unable to sustain the gains. There have been research reports suggesting that the Euro could strengthen to at least 1.60-1.80 against the dollar during 2005. These reports will increase the risk of aggressive dollar selling early in 2005 as liquidity strengthens and portfolios are rebalanced.
The US housing data was stronger than expected, but this did not have a significant impact. In general, US economic data is being ignored due to the concentration on structural issues. Firm data today would be likely to support the dollar only slightly. The US data next week will, however, be more important as it will set the tone for the first quarter and the dollar should gain some relief if the figures are strong. The overall yield considerations will offer some dollar support.
There is still evidence of underlying Euro buying and there is also evidence that any dip to below 1.35 will result in fresh Euro buying interest. The potential for underlying Euro buying will make it difficult for the dollar to secure a significant recovery.
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