Friday March 18, 2005 - 09:48:26 GMT
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Fx Daily Technical Strategy
Dollar inches higher ahead of Fed policy meeting
The dollar edged higher on Friday, extending the previous day's gains as investors pondered whether an upcoming Federal Reserve policy meeting would point to interest rates climbing at a faster pace.
With the market factoring in a quarter percentage point U.S. rate rise at Tuesday's meeting, attention has turned to whether the term "measured" when referring to the pace of monetary tightening will be omitted from the post-discussion report.
"The word 'measured' is going to be the focus of traders all around the world," said a dealer at a European brokerage.
If the term were dropped, that would heighten anticipation of the U.S. central bank stepping up the pace of its interest rate rises a potentially dollar-positive development, traders say.
Rising U.S. rates are likely to bring back some of the funds that have poured into assets that have boomed this year, including stocks in other countries and commodities.
By 06h40 GMT, the dollar fetched around 104.80 yen, versus 104.53 yen in late U.S. trade and near Thursday's high of 104.90 yen.
The euro eased to around $1.3365 from $1.3375 in late U.S. trade.
The dollar rose about 0.4 percent against the yen and 0.3 percent versus the euro on Thursday, boosted by safe-haven flows into U.S. Treasuries and the belief that Wednesday's sell-off on weak U.S. current account deficit data may have been overdone.
However, the dollar's gains were muted by a surprisingly weak business activity report from the Philadelphia Federal Reserve.
After being sold in the past month, the dollar steadied this week, partly due to data showing that the United States was able to fund its massive current account deficit a key factor in the dollar's three-year decline.
Some traders also said that speculators such as hedge funds have started to unwind dollar carry trades, in which they borrowed the dollar to buy high-yielding assets in other countries.
Emerging currencies that had been coveted earlier this year -- such as the Polish zloty, Turkish lira and South African rand have slipped from their recent peaks in the past few weeks.
The Fed has raised rates by a quarter percentage point at six straight meetings, taking the key U.S. rate to 2.5 percent.
Some in the market expect U.S. rates to rise as high as 4 percent by the year-end, though the pace of increases might be tempered by Fed chief Alan Greenspan's desire to sail a steady ship before his term ends next January.
"Greenspan doesn't want to tarnish his legacy, so he will want to make the market as normal as possible," the brokerage dealer said.
Greenspan is due to speak at 17h00 GMT, though he is not expected to comment on the economy or interest rates so near to the policy meeting.
The market hardly budged on comments from Japanese Finance Minister Sadakazu Tanigaki that Tokyo has no plan to change the currency composition of its massive foreign reserves.
Worries that central banks may diversify their reserves away from the dollar have dogged the dollar in the past month.
EURO/DOLLAR: Hesitating around current levels and likely to continue to do so today. Allow for more erratic and messy consolidation roughly between $1.3320 and $1.3420. While below $1.3450/1.3480 we favor another drop to $1.3320/1.3300 and probably no lower than $1.3250. Long term we remind that only a weekly close above $1.3600 confirms an upside breaks.
DOLLAR/YEN: Unable to break out of the current range and unlikely to do so ahead of Monday's holiday in Japan. The US dollar is not oversold against the Yen and momentum has turned neutral. For today allow for yet more consolidation between 104.00 yen and 105.00 yen.
STERLING/DOLLAR: While below the $1.9290/1.9330 area we shall allow for another downside probe of important support between $1.9100 and $1.9000. Note that Cable is not oversold and that momentum is only marginally bullish. For today expect more messy moves, with chart levels not holding well, between $1.9150 and $1.9300. A sustained break below $1.9100 sees a second deeper but brief pullback to $1.9050/1.9000 where prices should try and base slowly. Above $1.9330, while not our favored view, sees a lurch to the 1.9450 area where more consolidation is due.
@13h30 GMT: U.S. February Import Price Index
@14h45 GMT: U.S. March University of Michigan Survey
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