Friday January 7, 2005 - 11:19:47 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar payroll test
Immediate direction will inevitably be determined by the US employment report. There is a strong probability of initial dollar gains if the figure is above 220,000 while a figure below 130,000 would be damaging. The dollar's subsequent reaction will also be very important in assessing dollar prospects. Yield and growth considerations should offer support to the US currency in the near term, but the position is finely balanced as structural weaknesses will continue to limit dollar gains.
The dollar retained a strong position during Thursday and it remained stronger than 1.32 in New York. The dollar was unable to push through 1.3150 and drifted slightly weaker to near 1.32 in early Europe on Friday before weakening to 1.3240. There will be caution ahead of the payroll figure and some paring of long dollar positions is likely in the very short term which will underpin the Euro.
The waves of short-dollar position covering appear to have been completed for now and the US currency will find it more difficult to make headway as it will also need a clear increase in underlying dollar demand.
The latest jobless claims data was higher than expected with an increase of over 30,000 to 364,000, but most of this probably reflected seasonal factors. The employment report will be important today as it will provide the first-quarter economic backdrop, although the importance will probably not be as high as usual. A strong figure will reinforce expectations of further Fed rate increases. A weak figure would undermine confidence to some extent, but the figure would need to be very bad to disrupt Fed tightening plans. There is the potential for underlying dollar demand due to the greater focus on cyclical issues. The expectations of further Fed rate increases will support US yields and also offer underlying dollar support, but structural dollar weakness will persist.
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