Friday February 25, 2005 - 11:22:12 GMT
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INVESTICA Ltd - www.investica.co.uk
Oil threat to dollar?
The dollar found support in the 1.3250/70 resistance band against the Euro and the US currency managed to strengthen to a high of 1.3175 before settling back around 1.32. There was little move in early Europe on Friday. The Dow Jones index was firm on Thursday, but there was a further increase in oil prices and this will tend to hurt the US currency. A sustained increase in oil prices could eventually discourage the Fed from interest rate increases and there are also some concerns that overseas equity inflows into US markets are weakening.
The US data was received generally favourably on Thursday even though the headline data was slightly weaker than expected. There was a 0.9% decline in durable goods orders for January, but the underlying figure was stronger with a rise in goods excluding the volatile transport and defence sectors which suggests that business spending is strong. Jobless cams rose to 312,000 in the latest week, although this is still a low figure by historic standards. Markets will remain very sensitive to interest rate expectations and the GDP growth and inflation figures will be watched closely. An upward revision to the inflation figures contained within the GDP data would increase speculation over a more aggressive Fed tightening policy. Fed Governor Bernanke stated that he was comfortable with a measured pace of tightening, but the risks are skewed towards a faster pace of interest rate increases. Yield factors should offer dollar support and Bernanke also stated that he expected a GDP figure of near 4.0%.
The issue of central bank reserve shifts will remain very important for the US currency, especially as there is some evidence that equity inflows into the US have faded slightly. There will also be disappointment over the latest bond auction where foreign bidders took a relatively low 31% which will maintain fears that central banks will diversify away from the US currency. Overall dollar confidence is likely to remain very fragile with persistent fears over the current account deficit and a reserve switch. The dollar is likely to need positive news to avoid further losses.
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