Wednesday March 2, 2005 - 11:25:27 GMT
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INVESTICA Ltd - www.investica.co.uk
High-yield positioning dominates
The dollar has had a firmer bias over the past 24 hours gaining some slight support from a rise on Wall Street, although the principal drivers for dollar gains were weak Euro-zone data and a drop in the Australian dollar. In early Europe on Wednesday, the US currency was trading around 1.3170 against the Euro before strengthening to 1.3110. There is the potential for a further covering of long positions in commodity currencies and this will provide wider dollar support.
Fed Chairman Greenspan's comments will be important for the dollar on Wednesday, especially as there will be market speculation that he knows the content of the Friday payroll report. The dollar is likely to gain if there are remarks suggesting that a faster rate of US interest rate increases may be required. Conversely, the dollar is likely to be vulnerable if Greenspan chooses to emphasise the current account and budget deficits. Greenspan's comments are likely to be mixed and he will probably hint that further measured rate increases are the most likely outcome, but the net risks suggest some support for the US currency, especially as yield spreads have improved. The bond market will be important as a gradual increase in yields would be likely to support the dollar, but there will also be fears that rising yields are a due to declining overseas interest in US treasuries. This would raise concerns over the US current account deficit and limit potential dollar gains. In this context, the dollar's position is still precarious.
Euro-zone confidence will remain fragile after the very weak German unemployment figures and the Euro-zone concerns will underpin the US currency, especially as the Euro-zone inflation rate was slightly lower than expected at 2.0%.
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