Wednesday May 26, 2004 - 09:44:53 GMT
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INVESTICA Ltd - www.investica.co.uk
Fundamental weaknesses will damage dollar
Dollar confidence is likely to remain subdued in the short term with the fundamental weaknesses helping to undermine the currency. There will be further unease that high oil prices will stop a Fed tightening move in June. The Euro will be boosted by the move through 1.2080 and there is the potential for a move towards 1.2225 and possibly 1.2250, although the Euro could be vulnerable to a slight near-term correction.
The dollar was unable to hold support at the 1.2080 level and this allowed the Euro to strengthen to a high of 1.2130. The Euro was unable to make a convincing challenge above 1.2120 on Tuesday, but was making a fresh attempt in early Europe on Wednesday at 1.2125.
The US economic data did not provide a major incentive with consumer confidence edging marginally higher to 93.2 in May from 93.0 in April. The dollar was unable to gain any significant support from a rally on Wall Street and there were continuing concerns over the high level of oil prices. There will be further speculation that the Fed will delay a tightening, although very strong economic data next week would reverse sentiment again.
Although oil prices have been important, the dollar's weakness has also been due to fundamental vulnerability and its substantial overseas capital requirements.
German inflation rose to 2.1% in May and this will reinforce market expectations that the ECB will not cut interest rates in the short term. The Euro-zone capital account recorded outflows of EUR23.9bn in March which will be marginally negative for the Euro, but there was a healthy current account surplus.
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