Thursday January 13, 2005 - 11:32:13 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar vulnerable again
The record US trade deficit will revive market concerns over the US current account deficit. The dollar will be vulnerable if Fed tightening is in doubt. It is, however, more likely that the Fed will keep raising rates and yields should still offer some dollar protection. Pressure for Asian currency gains will also tend to ease upward pressure on the Euro. The overall dynamics should prevent very strong dollar selling unless the growth figures are bad.
The dollar edged lower ahead of the US trade data on Wednesday and the US currency weakened sharply after the data. The dollar weakened to a low of 1.3290 before a recovery back to 1.3250 and was little changed in early Europe on Thursday before a limited advance to 1.3230.
The November US deficit rose to a record US$60.3bn from an upwardly-revised US$56.0bn in October and compared with expectations of a narrowing to US$53.6bn. There was a decline in exports, the first drop since June. Total imports declined slightly, but there was a further increase in oil import value as volumes rose sharply. The figures will certainly damage dollar confidence after the brief respite in the first week of January and will renew fears over the twin US deficits.
While the Fed continues to increase interest rates, there is the potential for short-term inflows. The dollar will, however, be more vulnerable if growth appears to be faltering or rate increases are in doubt. For now, the Fed is likely to remain on track and there should still be a close balance between cyclical and structural factors.
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