Tuesday January 18, 2005 - 11:22:19 GMT
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INVESTICA Ltd - www.investica.co.uk
Vital US capital account data
The Euro/dollar struggled to find direction on Monday due to the US holiday, but the Euro did weaken to 1.3060 against the US currency late in Europe. This trend continued in early Europe on Tuesday with the Euro slipping to a low of 1.3010.
The Treasury inflows report will be important today. As well as the size and composition of the flows, the market reaction will also be very important as a background indicator of dollar confidence. The dollar will be vulnerable if the monthly figure is below US$45bn while a figure above US$65bn would offer short-term dollar support. The level of outflows from the US will also be significant, especially as it could be an important 2005 market trend. Underling structural dollar vulnerability will persist and there will be disappointment if equity flows are negative.
Interest rate differentials will also be important with continuing evidence that the widening yield gap is having a positive impact on the dollar. The most likely outcome is that the Fed will maintain a steady approach to raising interest rates, especially with oil prices pushing back to near US$50 p/b. Any co-ordinated hints over a faster pace of tightening from Fed officials this week would, however, increase speculation of a 0.5% rate hike in February and this would offer near-term dollar support. Dollar gains will be limited by structural weaknesses and the dollar will also be very vulnerable if the US economy starts to weaken.
Asian exchange rate policies will remain a very important background focus and the expectations of Asian currency gains is sapping Euro interest. There is the potential for further portfolio flows into Asia and any Asian currency appreciation would also take the strengthening pressure off the Euro. European comments will continue to be watched and persistent calls for Asian gains would weaken the Euro slightly ahead of the February 4-5 G7 meetings.
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