Wednesday February 16, 2005 - 11:27:45 GMT
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INVESTICA Ltd - www.investica.co.uk
What to expect from Greenspan
The dollar has remained on the defensive for much of the past 24 hours and weakened to a low near 1.3050. The dollar was unsettled slightly by political developments as the US was reported to have withdrawn its ambassador to Syria following the killing of a former Lebanon Prime Minister. There was also a paring of long dollar positions ahead of Greenspan's testimony, but the dollar edged back to 1.3020 in early Europe on Wednesday.
The growth indicators were overshadowed by the US Treasury capital inflows report. The headline inflows fell to US$61.3bn for December from US$89.3bn the previous month, but this was still above the trade deficit. There was a decline in official capital inflows, but this was offset by an increase in private bond inflows. There will be some concern that the purchase of US assets by US residents remained strong at US$21.6bn, but the figures for the first quarter of this year will be more important in this context as the dollar has been firmer. Further strong outflows would suggest a structural flow of funds out of the US and would undermine the dollar's medium-term outlook.
Fed Chairman Greenspan's congressional testimony will be very important for the dollar. If Greenspan hints at faster pace of interest rate increases, the dollar should secure significant support. Optimistic comments over the current account and budget deficits would also offer support to the US currency. Conversely, Greenspan concerns over the deficits would erode confidence and the dollar will also weaken if he suggests that a pause in US tightening is close. Greenspan traditionally maintains a balanced view, but the overall stance of his remarks will be important. The market reaction will also be important in determining whether the dollar's recent weakness is a correction from the January gains or the start of a sustained downturn. Overall, the forces on the dollar should still be close to balance with the dollar resisting a further sharp near-term decline.
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