Friday March 4, 2005 - 11:15:13 GMT
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INVESTICA Ltd - www.investica.co.uk
The dollar's payroll test
The dollar survived a test of support around the 1.3150 level and the US currency had a firm bias in New York on Thursday with a move to 1.3100 in late US trading. The dollar was little changed in early Europe on Friday ahead of the US employment data before a slight depreciation.
The employment report on Friday will certainly be important for the US currency. Payroll growth of 250,000 or more would strengthen optimism over growth and increase speculation that the Fed will move to tighten monetary policy at a faster rate over the next 2-3 months. The productivity figures for the fourth quarter were revised up more than expected to 2.1% which will help ease immediate concerns over inflation, but inflation concerns will still be significant. Even if the US retains a measured stance and the figure is closer to 200,000, the widening differentials will offer some background dollar support, especially with a lack of confidence in Euro-zone growth. This should limit the extent of any dollar sell off if the employment report is below expectations.
As expected, the ECB left interest rates unchanged at 2.0% at the policy meeting on Thursday. The ECB also cut its GDP growth forecasts for 2005 and narrowed the projected range for inflation while keeping the central rate unchanged. The ECB tried to remain confident on growth and, officially, still has a tightening bias on interest rates, but a short-term move to increase rates is unlikely. There will be concerns over high oil prices and a further rise in energy prices could push the central bank towards higher interest rates even if the growth figures remain disappointing. Weak growth will still tend to undermine the Euro in the short term.
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