Monday March 21, 2005 - 11:26:12 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed expectations boost dollar
Interest rate expectations will dominate in the short term ahead of the Federal Reserve interest rate decision on Tuesday. The markets are expecting a 0.25% increase and speculation over a more aggressive stance in the accompanying statement will offer dollar support ahead of the decision. This trend could be amplified by a further closing of high-yield and emerging-market currency positions. The US currency should, therefore, be able to retain a firm tone over the next 24 hours, but resistance will become increasingly tough as rallies encourage longer-term dollar selling to rebalance reserves.
The dollar pushed through resistance to a high of 1.3210 on Monday. The US data failed to offer any dollar support on Friday with the University of Michigan consumer confidence index weakened further than expected to 92.9 in March from 94.1 the previous month. There will also be concerns over the US stock market performance with the Nasdaq index weakening to the lowest level for 2005. If Wall Street fails to regain ground, unease over Wall Street trends would tend to weaken the dollar's medium-term prospects.
The Fed's interest rate decision will dominate the first half of the week. The markets are expecting a 0.25% rate increase and principal interest will focus on the statement following the decision. There will be further speculation that the Fed will remove the word 'measured', potentially hinting at a faster pace of rate increases over the next few meetings. The speculation over a more aggressive Fed stance will offer near-term support to the US currency with a closing of high-yield currency positions. If there is a change in rhetoric, there will also be greater uncertainty in markets which will tend to increase dollar volatility as the Fed could also be signalling that it thinks interest rates are close to a short-term peak.
The dollar will be vulnerable again if the Fed maintains the existing policy and further rally in the US currency is likely to generate underlying dollar selling on a rebalancing of reserves and Middle East dollar selling. It will, therefore, be increasingly difficult for the dollar to extend gains.
The latest IMM positioning data recorded an increase in long Euro positions of just over 7,000 in the latest week, pushing the long euro position to near 30,000. Positioning at this level will be a barrier to near-term Euro gains.
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