Monday March 14, 2005 - 11:22:04 GMT
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INVESTICA Ltd - www.investica.co.uk
Further tests of dollar support
The dollar weakened after the US trade report, although it did mange to stage a temporary recovery before weakening again in New York to the 1.3475 level. The dollar corrected back to 1.3415 in early Europe on Monday after the Euro again failed to push above 1.3475 and there was selling pressure on high-yield currencies which helped underpin the dollar.
The US trade deficit widened to US$58.3bn in January from a revised US$55.7bn in December. The export performance was slightly disappointing and there was a significant increase in overall import value even though there was a decline in oil imports The strength of imports will make it difficult to cut the trade deficit and will also generate surprise that a weaker dollar has not had a greater impact on import demand. This will increase speculation that a further US currency decline will be needed. The trade data will also ensure close attention will be paid to the treasury inflows data on Tuesday and the current account data on Wednesday. The dollar will be vulnerable if monthly capital inflows fall below the US trade deficit level and underlying dollar vulnerability will persist.
Inflation concerns will remain significant in the short term, especially after the sharp rise in bond yields last week. There will be further speculation that the US Fed will have to move to a more aggressive stance, although the Fed is likely to maintain a policy of 0.25% rate increases next week. A further jump in bond yields would be likely to force substantial position adjustments in high-yield and emerging currencies and this would be likely to provide short-term dollar relief even though the dollar could then weaken sharply on an exodus of funds from the US.
There will be further concerns over a diversification of reserves away from the dollar, especially with remarks by the Indian central bank that it was considering a change in policy. These fears will contribute to underlying negative dollar sentiment given the size of the current account deficit.
The latest IMM data recorded a decline in long Euro positions of over 10,000 in the latest week. Although the long position is still close to 25,000 contracts, the decline will lessen the risk of a sharp pullback in the Euro.
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