Tuesday March 22, 2005 - 11:13:08 GMT
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INVESTICA Ltd - www.investica.co.uk
Selling pressure on dollar rallies
The dollar pushed above the 105.0 level on Monday, peaking close to 105.45, but was struggling to hold these gains and settled close to 105.0 in early Europe on Tuesday.
Overall dollar sentiment has improved for now and there will be an important short-term focus on interest rate differentials. A Fed interest rate increase today, coupled with a warning over a faster rate of increases over the next 2-3 months, would strengthen the dollar's advantage in yield terms. This would offer some support to the US currency, although there will be a high risk of volatility after the decision, especially if there is a negative reaction from the bond market. If the Fed signals a measured stance, the dollar will be vulnerable to a short-term correction weaker.
The yen was supported by fresh official reports over a stronger Chinese yuan. There were reports that the Chinese authorities would allow a gradual widening of the yuan band to 0.6-1.0% and also switch to a trade-weighted basket. The persistent speculation of a Chinese move will offer some significant background support to the yen.
The head of Hong Kong's monetary authority warned against a rapid build up of Euro assets as this could destabilise markets. There is still likely to be a move to buy the Euro on any significant corrections weaker and this will also limit the potential for general dollar rallies against Asian currencies.
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