Wednesday February 9, 2005 - 11:29:55 GMT
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INVESTICA Ltd - www.investica.co.uk
The dollar was trapped within narrower ranges against the Euro on Tuesday with the dollar in need of a pause after the strong push stronger since Greenspan's testimony on Friday. The US currency held close to the 1.2750 level against the Euro for much of the day before edging back to 1.2790 in early Europe on Wednesday. Overall dollar sentiment remains firmer and there is scope for Euro selling on rallies against the dollar.
There is still greater optimism over the US budget position which is supporting near-term dollar sentiment. There is Democratic opposition within congress, although it is the attitude of moderate Republicans which will probably be more important. The underlying foundations of a narrower budget deficit are, however, very fragile and there will be renewed longer-term concerns over the US budget position. Near-term sentiment on the dollar should still remain slightly stronger, although there is likely to be a slightly greater mood of caution and the US trade figure on Thursday will provide an important test for dollar confidence. It is also the case that there will be caution ahead of the Thursday data.
There is likely to be underlying central bank Euro demand stronger than 1.28 and this will make it more difficult for the dollar to make further gains. There has also been some evidence that Greenspan's remarks are being reinterpreted and the key issue is still that the underlying US fundamentals remain weak. These background concerns will deter aggressive dollar buying.
The Treasury bond auctions will be watched closely to assess the level of overseas demand, particularly from Asia. Any shortfall in demand would be likely to unsettle the US currency.
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