Wednesday February 23, 2005 - 11:02:59 GMT
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INVESTICA Ltd - www.investica.co.uk
US inflation in focus
The dollar remained on the defensive during Tuesday, weakening to a low just beyond 1.3250 against the Euro and failing to make a significant recovery in New York. As well as doubts over central bank reserve policies, the dollar was undermined by strengthening oil prices and a sharp drop on Wall Street. The Euro retreated slightly to 1.3220 in early Europe on Wednesday.
The US consumer confidence data was slightly stronger than expected at 104.0, but this still represented a slight decline from January levels. Inflation trends will be more important in the short term and the consumer price data will be very significant for the US currency on Wednesday. A figure above 0.3% for the underlying rate would reinforce speculation that the US Federal Reserve would have to increase interest rates at faster pace to control inflation and would be likely to offer some support to the US currency. The dollar has, however, been consistently unable to strengthen on good news over the past week. A subdued inflation figure would be likely to weaken the US currency.
Dollar sentiment has also weakened significantly and it will be difficult to secure a near-term recovery. Principal concerns surround the policies of global banks and a diversification away from the US currency. The central banks are likely to take a cautious stance in actually selling dollars, especially as they will not want unstable markets. The fear of selling will, however, tend to weaken the dollar and reserve shifts will certainly limit the scope for a general recovery in the US currency. It is, however, the case that wider Asian currency appreciation would tend to alleviate upward pressure on the Euro. The German IFO data was slightly disappointing with a decline to 95.5 in February from 96.4 the previous month.
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