Monday January 24, 2005 - 11:58:21 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar correction nearly complete
The Euro strengthened back above 1.30 during Friday and the dollar weakened to 1.3080 in early Europe on Monday. The Wall Street performance will remain in focus after a further decline on Friday. The Dow Jones index has fallen for the first three weeks of the year for the first time since 1982 and this will raise concerns over a potential financing gap, especially if US investors are attracted overseas. This is likely to be offset by further speculation over capital repatriation by the corporate sector. The short-term data influences will be limited, although the US GDP growth and inflation figures on Friday will be significant.
The latest IMM data recorded a decline in long Euro positions of over 6,000 in the latest week, cutting the long dollar position to just below 10,000. The reduction will lessen the risk of further Euro losses. More generally, the number of short dollar positions had declined to a four-month low. Last time short dollar positions were this low in late September, the US currency subsequently weakened sharply. There should still be a reduced risk of aggressive dollar selling this time, but the positioning shift will lessen the potential for further dollar gains.
Global central banks still appear to be increasing their Euro exposures at the expense of the dollar and this will offer significant background Euro support. Global exchange rate policies will remain an important focus and the pressures for Asian appreciation will continue.
Pressure from Europe would tend to restrain the Euro against the yen, but a major reaction is unlikely unless there is evidence of an Asian shift. The World Economic Forum in Davos will be closely watched this week as it will give a good indication of the central banks and Finance Ministries' intentions ahead of the G7 meetings in early February.
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