Friday March 11, 2005 - 11:30:16 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar braced for trade report
The dollar remained under pressure during Thursday although it managed to resist heavy losses and found support at the 1.3450 level against the Euro. The US currency gained minor support from a positive outlook from Intel, but was still stuck close to the 1.3420 in early Europe on Friday as underlying dollar sentiment remained very fragile with a reluctance to buy the currency.
The trade data on Friday will have an important impact on the dollar and underlying confidence, especially as it has been a major short-term market focus. From a longer-term perspective, there will also be concerns that high oil prices will put further upward pressure on the US trade deficit. A narrower than expected deficit would offer near-term dollar relief, especially as it would encourage a closing of short dollar positions, but it will be difficult to secure sustained relief and buying interest given the underlying concerns over the deficit. There will also be further fears that there will be a diversification away from dollar reserves and this will ensure that dollar sentiment remains very fragile.
Fed Chairman Greenspan stated that he was not overly concerned over the US trade and debt positions, but that he was concerned over the US budget. The message was, therefore, clearly aimed at domestic politicians, although there may be some speculation that Greenspan knows that the January trade deficit figure will be better than expected.
Bond yields will remain important, especially after Greenspan's budget warnings. A gradual rise in yields could still offer significant dollar support, especially if it encourages a closing of long positions in high-yield and commodity currencies. Indeed, it is possible that a closing of high-yield speculative positions will trigger a sharp short-covering dollar rally. There will, however, be a clear danger to the dollar if there is a heavy sell-off in the market as it would increase fears over a reduction of US bond holdings by overseas central banks. A sharp drop in bond prices would also unsettle Wall Street.
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