Tuesday April 12, 2005 - 09:59:22 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces key tests
Yield considerations will still tend to weaken the yen on a potential shift into higher-yielding assets. The Fed minutes today could also increase speculation that the rate differentials will move even more in the dollar's favour. The yen will, however, gain support if there is a poor US trade report and there is also likely to be a reduction in long dollar positions on rallies back above 108.0. Dollar resistance is likely to be very tough on any fresh rallies back to 108.8 and the dollar offers little long-term value above this level. A US trade deficit above US$61bn could push the dollar down to 106.8, although the principal market feature is liable to be volatility. The Euro offers little value above 140.0 against the yen.
The dollar lost support at 108.0 against the US currency and fell to a low of 107.6 before stabilising in New York. The US currency failed to make a significant recovery in early Europe on Tuesday, but the yen was unable to push through 107.5.
The market is still concerned over the number of long dollar positions and this will continue to expose the dollar to downside risks, especially with fears over the US trade position. In this context, a bad US trade figure could result in heavy downside pressure on the US currency on a liquidation of long dollar positions.
There will be further speculation over a yuan revaluation following reports from German Finance Minister Eichel that the Chinese were considering a revaluation. The overall risks remain asymmetric given that any revaluation would strengthen the yen sharply while no change in China's policies would not have a major impact on the US currency. G7 finance officials are also likely to call for Asian currency appreciation ahead of the G7 meetings starting at the end of the week and this will offer support to Asian currencies. The tight Singapore policy will also offer yen support.
The latest money supply and bank lending data recorded a very small improvement with the slowest annual decline since 2001, but there was still an annual drop in lending while money supply growth is subdued. The Bank of Japan will not be in a position to tighten monetary policy in the short term.
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