Wednesday April 13, 2005 - 10:09:46 GMT
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INVESTICA Ltd - www.investica.co.uk
Conflicting pressures continue
The dollar weakened in an initial reaction to the US trade report, although the losses were short lived and the dollar rebounded strongly. The dollar weakened in early Europe to 1.2935 after failing to push through 1.2880.
The US trade deficit widened to a record US$61.0bn in February from a US$58.5bn deficit the previous month. Exports were unchanged while there was a 1.6% increase in imports even though there was a monthly decline in oil imports. There had been pessimism over the trade report before its release and there was, therefore, some relief that the data was not even worse. There was also some relief for the dollar in the form of a lower US deficit with China, but the overall report offered little support for the US currency. The weakness of manufacturing exports will be a serious concern and the US economy will remain vulnerable on sustained high oil prices. Strong import demand will maintain the pressure for higher interest rates to slow domestic demand and ease the imbalances. The widening trade deficit will maintain the risk that dollar confidence will weaken sharply.
The FOMC minutes for the March interest rate meeting reported that there were uncertainties over the inflation outlook. Although members were generally optimistic that inflation could be contained, there were greater concerns than at the previous meeting and also a general mood of uncertainty over inflation and the required Fed response. The Fed officials were reluctant to move towards a faster pace of tightening, but there was greater speculation that such a policy change might be required. In this environment, The Fed is likely to retain a policy of 0.25% rate increases for now, but there will still be some speculation over a faster pace of increases. The markets had expected a tougher stance from the Fed and the dollar failed to gain significant support.
Markets are starting to focus more on the French EU constitution referendum at the end of May. A yes vote is still the more likely outcome and the implications of a no vote are also likely to be contained. The political fears will still tend to lessen Euro support to some extent.
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