Tuesday February 15, 2005 - 11:20:56 GMT
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INVESTICA Ltd - www.investica.co.uk
Where next for the dollar
The US data today will be important, especially as it will help set the market tone ahead of Greenspan's testimony to congress on Wednesday and Thursday. In particular, the US Treasury report on capital inflows will be important as markets are wavering in their risk assessment of the US current account deficit. There is slightly greater optimism that the deficits can be financed comfortably, helped by Greenspan's recent comments, but this confidence is very fragile. A strong figure for capital inflows would reinforce confidence in the ability to finance the deficit and would improve dollar confidence. Conversely, a weak figure below US$50bn would erode dollar confidence again.
There are very strong expectations of a further increase in US interest rates which will limit the impact of growth data and the Fed comments on Wednesday are likely to be more important in determining expectations of the pace of tightening. Hints that the Fed will soon pause the tightening process would hurt the dollar, while comments speculating over a more aggressive tightening would support the dollar. Greenspan is likely to offer some support to both points of view, but he is more likely to voice concerns over inflation which should offer mild dollar support. There will also be interest in the issue of inflation targeting. Greenspan has resisted pressure for an inflation target and further opposition would probably be slightly negative for the US currency.
The comments from ECB member Papademos offered some Euro support as he stated that risks to price stability had increased slightly. These comments were in contrast to the comments made by other ECB members. A change in rates still looks unlikely, but near-term comments will remain in focus. Euro-zone fourth-quarter growth was disappointing with the annual rate held to 1.6%. The German ZEW index was, however, stronger than expected at 35.9 for February which will offer some Euro support.
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