Wednesday March 23, 2005 - 11:25:25 GMT
Share This Story
INVESTICA Ltd - www.investica.co.uk
Inflation also poses dollar risks
The dollar weakened slightly ahead of the US Federal Reserve decision, but the dollar quickly reversed initial losses after the rate decision and strengthened to a high of 1.3055 before correcting slightly to 1.3080 in early Europe on Wednesday. Subsequently, the dollar strengthened again to 1.3030.
As expected, the Federal Reserve increased interest rates by 0.25% to 2.75%. In the statement, the Fed expressed some greater concerns over inflation stating that near-term upward pressure on prices had increased and that companies had greater pricing power, although the Fed also stated that long-term inflation expectations were under control. The Fed also retained optimism that the monetary stimulus could be removed at a measured pace. The Fed is, therefore, likely to retain a policy of steady 0.25% rate increases over the next few meetings, although there will be a greater risk of a 0.5% rate increase. There will also be market speculation over a more aggressive Fed stance, although the dollar will find it difficult to secure further strong buying interest, especially as the markets have over-reacted slightly.
The dollar will still gain support from expectations of higher interest rates and there will be further pressure for a closing of long positions in high-yield currencies in the short term, especially as positioning had become extreme. The position will, however, be finely balanced as rising yields could also start to destabilise longer-term inflows into the US.
In this context, the US bond market and Wall Street performance will be important, especially after Wall Street weakened on Tuesday. Sustained losses for stocks would be likely to unsettle the US currency given the substantial underlying financing requirement and the current account deficit at around 6.0% of GDP. The dollar will also be vulnerable if inflationary pressure rises at the same time as growth starts to weaken. The possibility of a rapid dollar reversal should not be discounted.
There will be a further medium-term diversification into the Euro and this is likely to cap dollar gains as central banks will use dollar corrections stronger to sell the US currency. The Bundesbank also rejected calls for a weaker Euro stating that German competitiveness was not weak in historic terms. The German IFO index was weaker than expected at 94.0 for March from 95.4 the previous month. There were also investment outflows from the Euro-zone in January. These figures combined will tend to weaken the Euro.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."