Friday April 15, 2005 - 10:08:09 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar still faces tough resistance
The dollar managed to break Euro support at 1.2850 and pushed to a high of 1.2765 on Thursday as the Euro also lost support at 1.2810. The dollar edged back to 1.2840 in early Europe on Friday.
There has been further speculation over aggressive dollar buying by longer-term investors. This speculation will offer further near-term dollar support, although it is more likely that it reflects a closing of short positions. In this context, global growth expectations and commodity prices could be important. Evidence of slower growth would increase the risk that long commodity-currency positions will be liquidated and this would offer near-term dollar support. It is, however, much more doubtful whether any sustained evidence of weaker global growth would underpin the US currency in the medium term, especially as there would be worrying implications for the US trade account and ability to finance the current account deficit. Given the substantial current account deficit, any sustained increase in risk aversion would also be unlikely to provide a favourable backdrop for the US currency even if there was a near-term flow of funds into US Treasuries.
The Treasury monthly capital inflows data will be important for the US currency. The level of inflows and market reaction will be important in determining the extent of confidence in US assets and it will also indicate the degree of concerns over the US current account deficit. The immediate risks are likely to be skewed towards in favour of the US currency as it will be in a position to gain on a strong figure while the US currency has been able to survive poor data this week. The longer-term implications of weak data would be less encouraging as the US current account position is still precarious.
The Wall Street performance will need to be watched closely after a decline to a fresh 2005 low during Thursday. Further declines would be likely to erode confidence in US markets and also encourage a slowdown in US consumer spending. At the weekend meetings, G7 countries are likely to express their expectations that the dollar will need to decline in the longer-term and this is likely to deter dollar buying to some extent. Political clashes over US budget policies and Euro-zone growth trends would also be likely to undermine the US currency.
Euro sentiment will remain weak in the short term with unease over the French EU referendum and economic doubts over the economy's potential. This could slow the rate of Euro buying, although there will still be structural buying by central banks.
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