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Friday February 25, 2005 - 09:21:51 GMT

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FX Daily Technical Strategy

Dollar treads water ahead of U.S. GDP data


The dollar traded in a thin range against the euro and the yen on Friday as traders waited to see if U.S. economic data due later in the session could breathe life into a stalled market.

Analysts and traders said the market was torn between the dollar-positive factors of rising official interest rates and strong growth on one hand and the persistent drag of the massive U.S. current account and budget deficits on the other.

Taisuke Tanaka, a forex strategist at Morgan Stanley in Tokyo, said the dollar would be supported against the yen in the short term by rising U.S. rates, even if it fell against the euro on worries about the deficits and inflation.

Revised U.S. gross domestic product data for the last quarter of 2004 is due at 1330 GMT.

Federal Reserve Board Governor Ben Bernanke gave the market reason to expect a strong figure, saying on Friday he expected the revision to show growth of around 4 percent.

Some analysts said an upward surprise could boost the dollar.

Bernanke also said he was comfortable with the Fed's measured pace of tightening policy, but he also said the size of the U.S. current account deficit was unsustainable.

The Fed's funds rate is now 2.50 percent, up from 1 percent last June. Markets widely expect it to be raised to 3 percent by early May.

At 06h21 GMT, the euro was unchanged against the dollar at around $1.3199 but down from a peak this week near $1.3270. It has shed 2.7 percent against the dollar this year.

The dollar was also unchanged at 105.31 yen, having already rebounded from a low around 103.80 yen hit on Tuesday. The dollar is up 2.8 percent against the yen so far this year.

The yen traded at 139.10 yen per euro, near a seven-week low of 139.34 hit on Thursday.

After hitting three-month highs against the euro and the yen earlier in February, the dollar retreated despite the Fed repeating its commitment to raising rates and data showing weak growth in the euro zone and contraction in Japan.

A report on Friday showed deflation deepening in Japan, with the core consumer price index falling 0.3 percent in January from a year earlier, compared with a decline of 0.2 percent in each of the previous two months.

While the yen showed little reaction to the data, some traders said Japanese industrial output figures for January due on Monday could disappoint, given shrinkage in its trade surplus that month, and that could weigh on the yen next week.

Some economists argue that if the U.S. economy keeps growing at a relatively fast clip compared with Europe and Japan, the resulting demand for imports would likely result in a continued widening in the trade and current account gaps this year.

An unexpectedly strong rise in core U.S. durable goods orders in January helped lift the dollar on Thursday, extending a recovery after it was hurt by reports earlier in the week that South Korea planned to diversify its foreign exchange reserves.

The Bank of Korea later said it had no intention of selling dollars for other currencies. Japan's Finance Ministry also said it had no intention of changing its reserves, the world's largest at almost $850 billion, to buy more euros.


EURO/DOLLAR: The euro should now base for one more rally towards Fibonacci resistance at $1.3305. Break here is needed to open the way for a channel breakout target set at $1.3415. Immediate support for today comes in at $1.3140 (Fibonacci), with crucial support from 100-day moving average at $1.3055. The 55-day moving average support is still holding on a closing basis and thus only a close below this support at $1.3165 will cause us to abandon our view of another rally in the euro. Overall, we need a close above candle resistance at $1.3270 to spur the euro higher.


DOLLAR/YEN: The dollar appears to be tracing out a five-wave rally off the 103.80 low which may be nearing completion as we get closer to 106.00. First sign that the rally has ended will be a break below support at 105 (Elliott) and more crucial Fibonacci support at 104.30. The dollar yesterday ended above 100-day moving average resistance which now turns to support at 104.70 and thus a close back below this support will also confirm our dollar-bearish view.


STERLING/DOLLAR: A break below immediate support at $1.9010 will be the first confirmation that a top is in place. This in turn will open the way for a deeper sell-off towards daily mid-Bollinger support at $1.8890. The rally in cable continues to stall at Fibonacci resistance at $1.9150 and only a break above this resistance will open the way for a rally towards channel resistance at $1.9270.


@13h30 GMT: US. Revised Q4 GDP, Q4 Personal Consumption and Q4 GDP Price Deflator

@15h00 GMT: Existing Home Sales




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