Friday February 4, 2005 - 11:27:15 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar's day of reckoning
The US data was mixed with jobless claims declining to 316,000 from 325,000 the previous week. The ISM services index, however, weakened to 59.2 in January from 63.9 and there will be some concern that the employment component weakened to 52.2 from 55.0 which could signal a disappointing payroll report, although the correlation over recent months has not been strong. The productivity growth rate slowed to a four-year low in the fourth quarter with the annual increase falling to 0.8% and this will maintain inflation fears over the economy. It will also maintain expectations of further Fed rate increases.
The employment report will inevitably be very important on Friday. If, however the data release is close to consensus, the dollar will aim to secure benefit from widening interest rate differentials. The US currency is likely to strengthen if the payroll figure is above 250,000 while a figure below 150,000 would hurt the dollar, although the markets may be slightly more forgiving of a poor figure.
As expected, the ECB left interest rates unchanged at 2.0%. The comments on inflation were slightly milder than expected with ECB Chairman Trichet confident that inflation would dip back below 2.0% this year. The ECB was, however, also concerned over strong rises in house prices and it is not entirely comfortable with the situation. In the near-term rates will remain on hold and the market's attention on short-term interest rate differentials, currently at 0.5%, will erode Euro support. The differentials are, however, not high enough to ensure substantial dollar support and structural Euro demand remains likely below 1.30.
The G7 meetings will be important, although expectations of significant currency-policy shifts have been dealt a further blow with the fact that US Treasury Secretary Snow will not be attending the meetings. The Euro will be vulnerable if the European officials voice concern over Euro strength.
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