Monday February 7, 2005 - 11:32:19 GMT
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INVESTICA Ltd - www.investica.co.uk
Near-term sentiment shift
The dollar initially weakened after the US payroll report, dipping beyond 1.30, but there was a swift reversal and the dollar pushed to a high of 1.2825 before retreating back to 1.2860. The dollar retained a firm tone in early Europe on Monday, although there was resistance around 1.2840.
The US employment report was weaker than expected with a monthly payroll increase of 146,000 compared with expectations of an increase close to 200,000. The December and November figures were also revised down by a total of 29,000. The unemployment rate, however, fell to 5.2% from 5.4%. There will be reduced expectations of a more aggressive near-term Federal Reserve monetary policy and this will discourage aggressive dollar buying, but a gradual tightening policy will still offer underlying dollar support. Wall Street trends will be important as firm asset prices would help reinforce the US dollar's near-term attraction on stable financial markets and yield grounds.
Fed Chairman Greenspan's comments on the US current account were significant on Friday. Greenspan stated that market forces, coupled with action to curb the US budget deficit would start to stabilise and eventually cut the current account deficit. The comments were certainly less alarming than the remarks seen late last year and this helped strengthen the US currency. The market forces will, however, include a weaker dollar and the comments do not justify strong dollar buying as there will still be underlying concerns. It is more the case that underlying US currency sentiment has improved and, in this environment, the comments were interpreted positively. It will still be difficult for the dollar to sustain a strong advance, particularly as there is likely to be structural dollar selling from the central banks. It is, however, still the case that dollar selling pressure will remain lower in the short term.
The G7 meetings were in line with expectations and the statement released after the meeting was identical to the one last February. The markets will look to US deficit reduction measures and the budget proposals will, therefore be significant. Bush will look for a freeze on may discretionary spending plans which will underpin near-term dollar confidence. There will, however, be congressional opposition and measures are likely to be diluted. The budget debates will drag on for months and market interest is liable to fade.
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