Friday December 31, 2004 - 11:17:29 GMT
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INVESTICA Ltd - www.investica.co.uk
New Year dollar test
Dollar confidence will remain weak with persistent concerns over the current account deficit. The weak Chicago PMI index will also increase unease over the although growth and yield indicators should still be dollar supportive. Some profit taking on long Euro positions and low trading levels should offer the dollar some relief today, but with the risk of more aggressive dollar selling early in 2005. Next week will, therefore, be very important for the dollar.
The dollar weakened to a low of 1.3667 before correcting back to 1.3630 in early Europe on Friday. There is likely to be a further correction in the Euro against the yen and possibly Sterling which should lessen upward pressure on the Euro against the dollar. It will be more difficult for the dollar to secure more durable relief given the degree of negative sentiment and concerns over capital flows.
The US jobless claims data was slightly better than expected with a decline to 326,000 from 331,000 the previous week, but the report was overshadowed by the Chicago PMI report. The headline index weakened to 61.2 in December from 65.2 in November and there was a sharp decline in the employment component to below 50 in December. This will increase interest in the national PMI employment and headline reports next week to assess whether there is wider evidence of a weakening labour market or whether the Chicago weakness was isolated.
The central bank and finance ministers will also be an important focus early in 2005. Intervention still looks unlikely at this stage, but the authorities will want to stop aggressive speculative dollar selling as this could soon spiral into heavy dollar losses beyond 1.40.
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