Monday January 10, 2005 - 11:12:06 GMT
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INVESTICA Ltd - www.investica.co.uk
Treasury interest rate concerns?
The yield considerations will continue to offer dollar support in the short term and fresh declines in commodity prices could force a further covering of short dollar positions. Comments from US administration and Fed officials will remain under close scrutiny due to speculation that there is at least unofficial agreement to stem further dollar losses. There will, however, be the need for action on deficits rather than rhetoric. From a very short-term perspective the Euro is now over-sold.
The dollar weakened in initial reaction to the payroll data on Friday, but the US currency rallied strongly in New York with a move to a high of 1.3025. The dollar weakened back to 1.3090 in early Europe on Monday. The headline US payroll figure was slightly below expectations at 157,000, but the November figure was revised up and the 2004 payroll growth was the strongest for four years.
The US currency drew significant support from comments by US Treasury Secretary Snow. He repeated his standard comments over the administration's strong dollar policy. There were, however, two subtle differences this time. He refrained from comments stating that the dollar's levels should be set by markets and he also stated that the US was committed to a reduction in the budget deficit. Over-interpretation is dangerous, but these comments invited the possibility that there would be a concerted effort to prevent further dollar declines.
The markets will continue to take any commitment to cutting the deficit as positive for the US currency, but they will also demand action rather than rhetoric and sustained deficit reduction will still be very difficult. Rising interest rates will also put upward pressure on US Treasury interest payments and this will make it more difficult to curb the deficit. The administration's motive, therefore, may well be to stem US Fed rate increases and a firmer dollar would lessen the risk of a sharp increase in interest rates as inflation fears would ease slightly.
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