Monday April 11, 2005 - 10:28:10 GMT
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INVESTICA Ltd - www.investica.co.uk
Trade fears battle with yield hopes
The dollar was unable to break resistance close to 1.28 against the US currency and the US currency weakened back to 1.2935 in late Friday in New York. There was a closing of long dollar positions ahead of the weekend and the dollar was also unsettled by reports that the military had forced a plane down close to Rome. The dollar held close to 1.2930 in early Europe on Monday before weakening to 1.2960.
The battle between trade and interest rate considerations will be in prime focus this week. The latest monthly trade deficit will be released on Tuesday and a poor figure would reinforce dollar vulnerability on trade and current account deficit fears. Markets are looking for a US$59bn deficit, the second highest on record, and a deficit above US$60bn would expose the currency to selling pressure. Lower oil prices will, however, offer some support, especially as it will ease upward pressure on energy imports.
There will also be expectations of a more aggressive Fed tightening, especially if the Fed minutes for march reveal greater concern over inflation and suggest a more aggressive Fed tightening policy over the next 2-3 meetings. Yield factors will underpin the US currency, particularly if there are expectations of a more aggressive stance, although much of this is now reflected in the dollar's recent rally. The US currency could gain strongly if there is a combination of favourable trade data and hints over faster US rate increases. Conversely, a poor trade figure and Fed comfort over inflation would hurt the dollar.
The latest IMM data recorded a decline in long Euro positions of over 10,000 in the latest week, cutting the net long Euro position to just under 7,000 contracts. This will reduce the threat of a further closing of long Euro positions and will make it more difficult for the US currency to rally through tough resistance levels close to 1.28. The overall decline in short dollar positions will also lessen the potential for US currency gains.
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