Thursday January 6, 2005 - 11:15:58 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces important test
The dollar will gain some support from interest rate trends with the wider yield gap over Euro offering support. The evidence also suggests greater caution over selling the US currency and sentiment has switched, but these positive influences will still be offset by current account fears and underlying Euro demand to rebalance reserves. The question of whether the dollar can extend the current rally is still finely balanced. Overall the risks of a move to 1.30 have increased to near 50%.
The dollar strengthened to a high of 1.3215 against the Euro on Wednesday before retreating back to 1.33. The Euro still encountered selling pressure on rallies and dipped back to 1.3260 in New York, weakening further to below 1.32 in early Europe on Thursday to a low of 1.3170. The Dow Jones performance remained slightly disappointing and the lack of New Year advance will tend to lessen the potential for strong dollar gains.
The US ISM index was slightly stronger than expected with an increase in the headline index to 63.1 in December from 61.3 the previous month. The employment index dipped only marginally to 54.9 from 55.0 and this should ease fears over the Friday payroll report slightly. The employment report will set the market tone for the next week, although the importance has eased slightly following the Fed's aggressive comments on interest rates. Unless the report is extreme, it is not likely to have a major impact on interest rate expectations as the Fed is focussing on inflation indicators rather than concentrating solely on the employment report. Yield factors will be significant and the yield spread for US Treasuries over German notes has increased to 74 basis points, the highest level since December 2000. The yield gap will offer dollar support.
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