Saturday January 22, 2005 - 14:15:58 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex:: Long-term dollar vulnerability
The dollar remained generally firm over the week and the US currency strengthened to a high of 1.2925 before a retreat back to 1.3050 in New York on Friday. There are still conflicting forces on the dollar and the data this week offered some near-term advantage to the US currency as structural fears have eased. There will still be major doubts over longer-term trends.
The prime focus as far as data is concerned was the Treasury capital flows data. There were inflows of US$81.0bn for November compared with a revised US$48.3bn in October. The headline data eased immediate fears that the US would face difficulties in securing sufficient capital inflows to offset the current account deficit. There will be some doubts over the quality of the inflows and there will also be concern that the weak Wall Street performance in 2005 will discourage capital inflows as well as pushing capital out of the US. Nevertheless, there will be reduced short-term fears over deficit financing. There will also be optimism over repatriation flows generated by the administrationís 2005 tax break. The overall impact may be relatively low, but speculation over inflows will help to curb aggressive dollar selling.
The Philadelphia Fed index weakened to 13.2 in January from 25.4 the previous month and there was also a decline in the New York manufacturing index. The interest rate trends have remained significant and there has been a barrage of Fed comments over the past week. Fed Governor Poole, for example, warned that the Fed would be prepared to make more aggressive action to keep inflation under control. The December inflation figures were slightly weaker than expected with a 0.1% decline while the underlying rate rose 0.2%. The Fed will be concerned over potential wage inflation and will certainly monitor the situation closely, but the most likely outcome is that the central bank will continue with measured tightening and 0.25% rate increases. There were hints to this effect by Greenspan in a magazine interview and it is Greenspan's view that counts.
G7 exchange rate policy will remain an important market focus. European officials are likely to push for Asian appreciation at the early-February meetings, but there is no evidence yet that Asia is prepared to take action. Further resistance to Asian gains would increase the risk of fresh upward pressure on the Euro given that markets still expect dollar trade-weighted depreciation. There is still the longer-term potential for Asian appreciation which would ease strengthening pressure on the Euro. There will be underlying buying of Euros by global central banks which will offer good Euro support against the dollar.
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