Tuesday March 8, 2005 - 11:10:23 GMT
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INVESTICA Ltd - www.investica.co.uk
Yield plays dominate
The trading incentives were muted during Monday and the US currency made some headway against the Euro with a move to 1.3180 before dipping back to 1.32. The dollar was slightly lower at 1.3220 in early Europe on Tuesday and subsequently weakened to 1.3260.
There was some reconsideration of the Friday employment report on Monday, although the prime consideration was a covering of short dollar positions after the Euro failed to make further headway. The comments from Fed officials will be important over the next 24 hours. The most likely outcome is that the Fed will signal a continuation of the measured approach to tightening with a further 0.25% rate increase for March. This Fed stance will not lead to aggressive dollar buying, but should limit selling pressure on the US currency, especially as there is a longer-term yield gap over Euro-zone bonds.
The markets are in the mood to concentrate on structural and US deficit issues ahead of the important Friday trade report. There will certainly be further concerns over the US weakness and markets will also be nervous ahead of the Friday US trade report, especially as high oil prices will increase speculation that a widening oil deficit will hurt the trade gap as a whole in 2005. The IMF also warned over US imbalances and this will unsettle confidence in the US currency.
ECB member Wellink warned over medium-term inflation pressure and comments from European officials in general will be watched closely to assess whether there is a more determined effort to increase interest rate increase expectations or whether it signals divisions within the ECB.
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