Saturday April 16, 2005 - 11:09:42 GMT
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INVESTICA Ltd - www.investica.co.uk
US growth in doubt
The US currency was subjected to considerable volatility during the week. The dollar strengthened to a high of 1.2770 during Thursday, but it was unable to hold the gains beyond 1.28 and weakened back to 1.2925 on Friday.
There were several important data releases during the week including the US trade deficit and the treasury inflows report.
The trade deficit widened to a record US$61.0bn for February compared with expectations of a US$59bn shortfall. Exports were unchanged over the month while there was a further increase in overall imports despite a decline in oil imports. The widening manufacturing deficit will also maintain medium-term dollar vulnerability on concerns over the underlying trade deterioration.
The Treasury capital inflows report recorded capital flows of US$84.5bn for February after inflows of US$92.5bn the previous month. There was an increase official inflows and there will also be some concern over a decline in equity inflows. In this context, the Wall Street performance will be important in the medium term. The US market struggled over the week as a whole with significant declines over the second half after company profit warnings.
The retail sales growth was disappointing for March with a 0.3% monthly increase and there was also a further decline in consumer confidence for April. High energy prices are undermining confidence and spending power, while there will also be some concerns over Wall Street trends. There is the potential for greater doubts over near-term spending trends and this will tend to weaken the dollar if rate increases are in doubts over the second half.
For now, the US Federal Reserve will continue to increase interest rates. There is also the possibility that of a covering of short dollar positions to fund commodity-currency long positions. There is, however, also the possibility that longer-term interest rate expectations will be scaled back. There is also the possibility of stagflation fears which would undermine dollar sentiment.
There will be further political concerns surrounding the EU constitution. The French are due to vote on the constitution at the end of May and there will be fears over the implications of a no vote, especially as opinion polls are pointing to a no vote. The most likely outcome is that there will be a yes vote in the end and the reaction to a no vote will also probably be limited. The uncertainty will still unsettle the Euro in the short term.
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