Thursday February 24, 2005 - 11:13:58 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar vulnerable on capital flows
The dollar held close to the 105.0 level during much of Wednesday as the dollar pessimism of the previous day eased slightly, but there was little evidence of significant dollar buying. The US currency was hampered by exporter selling above the 105.0 level, offset by buying of Euro-zone bonds.
The issue of Asian reserve management will remain a very important background focus. The immediate fears have been eased by denials of dollar selling by Korean and other Asian central banks, but the risks are skewed towards a weaker dollar in the medium term given the underlying pressures.
The latest capital account data reported that there were overseas inflows into Japanese equities for the 18th consecutive week and there were also capital flows back to Japan. Despite doubts over Japanese growth, the capital flows are likely to remain yen positive and these flows will be enhanced by capital repatriation over the next 4-5 weeks ahead of the fiscal year end. These flows will provide a very tough barrier to dollar gains over the next few weeks, although there will also be short-term capital flows into European bonds.
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