Friday April 8, 2005 - 10:17:03 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar caution ahead of trade report
The dollar weakened to a low of 1.2940 against the Euro early in New York on Thursday, but the US currency then rallied back to 1.2840 in late New York. The US currency was supported to some extent by a drop in oil prices and remained firm in early Europe on Friday at 1.2820.
The ECB produced no surprise with the interest rate decision as rates were left unchanged at 2.0%. ECB Chairman Trichet voiced significant concern over oil prices and issued a warning over the possibility of a rate increase, but the ECB comments also suggested that the bank was confident that the underlying inflation remained under control. Overall, the Trichet comments on inflation and interest rates are still likely to be aimed at the domestic audience rather than the currency markets. The ECB will be looking for opportunities to increase rates, but it is unlikely that the bank will be able to consider a near-term rate hike given the weak domestic growth indicators.
US jobless claims fell to 334,000 in the latest week from 353,000 previously, but this will not have a significant impact. Markets will remain anxious for evidence on inflation and interest rates, although attention will start to focus more on the trade account given that the latest monthly deficit figure will be released next week. Fed Governor Santomero stated that inflation was contained which suggests a preference for a further gradual monetary tightening, but the comments from Poole remained more aggressive as he stated that energy prices and company pricing power have increased the inflation risks. There will still be some expectations that the Fed will be forced to tighten policy more aggressively to curb inflation and this will offer dollar support, although strong buying interest is unlikely.
There will still be underlying Euro demand from central banks and this will be an important underlying factor. The Russian central bank indicated that it expects reserves to increase by close to US$60bn this year and, given the diversification into the Euro, this would involve Euro buying of over US$10bn.The dollar will also remain vulnerable on background current account fears.
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