Thursday February 10, 2005 - 11:13:28 GMT
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INVESTICA Ltd - www.investica.co.uk
Trade reaction crucial
The dollar struggled to escape from narrow ranges on Wednesday as caution set in ahead of the US trade report on Thursday. The dollar failed to push through 1.2750 and drifted back to 1.28 in New York. The dollar was also hampered slightly by a weak Dow Jones performance and was little changed in early Europe on Thursday.
The trade report will be very important on Thursday, especially after the shock deficit of US$60.3bn last month. The November deficit should be revised down due to a reported error in the Canadian figures. The December deficit figure and dollar's reaction will be an important indicator of underlying dollar sentiment. A deficit significantly below US$57bn would maintain market optimism that there is likely to be progress on cutting the deficits and would boost dollar sentiment, while a deficit widening would revive market fears over the US deficits. Even with a narrower deficit, there will still be major longer-term doubts over the US current account trends. The levels of capital repatriation will be watched closely as the indications are that the capital flows back to the US will be stronger than expected. This would offer background support to the dollar and help offset the current account fears.
Fed Governor Guynn reported on Wednesday that the Fed might have to drop the phrase measured from policy statements and the phrase that policy is accommodative. This could suggest that the Fed will push for a faster rate of interest rate increases which would offer near-term dollar support, although there will be some uncertainty over what the removal of accommodative would imply. It could indicate that the Fed will need to take a more aggressive stance, although it could also be interpreted to mean that the tightening process is nearly complete. The overall hints should offer some dollar support.
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