Wednesday January 26, 2005 - 11:11:36 GMT
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INVESTICA Ltd - www.investica.co.uk
Long-term fears over budget projections
The dollar held support at 1.3070 against the Euro on Tuesday and the US currency was able to strengthen to a high of 1.2950 before a retreat back to 1.3000. The German IFO index was slightly stronger than expected and there were modest capital outflows from the Euro-zone in November which should not have a major impact.
Chinese resistance to a revaluation ahead of the G7 meeting will tend to underpin the dollar in the short term on a wider covering of short dollar positions. The impact on Euro/dollar is, however, mixed as Asian resistance to gains would also renew pressure for the Euro to be the primary mechanism for medium-term dollar depreciation. There is also the possibility of tensions between officials ahead of the G7 meetings and this would be likely to undermine the US currency. If the issue of Asian currency appreciation is blocked by officials, attention may also return to the twin US current and budget account deficits which would also increase dollar vulnerability.
The US consumer confidence index was stronger than expected with the index rising to 103.4 in January from a revised 102.7 in December, although there will be slight disappointment that the expectations index declined. The dollar was also relieved by a rebound in the Dow Jones index, although the rebound in the technology sector was disappointing.
The US budget trends will remain an important medium-term focus. The Congressional Budget Office has increased its deficit forecast for the current fiscal year to US$368bn from US$348bn and this excludes military costs which will push the deficit well above US$400bn. The budget deterioration in the face of firm growth and still low interest rates is particularly worrying for the US economy and dollar from a medium-term perspective.
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