Wednesday June 2, 2004 - 09:57:05 GMT
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INVESTICA Ltd - www.investica.co.uk
Caution required over dollar selling
The US currency is struggling to take advantage of strong data and the dollar is likely to remain on the defensive in the short term due to fears over high oil prices, a less aggressive Fed stance and global security issues. There is the potential for a medium-term move to 1.25, although it is doubtful whether short dollar positions offer good value beyond 1.2280 ahead of the Friday employment report, especially as short dollar positions will be covered ahead of the data.
The dollar was unable to strengthen beyond the 1.2190 level against the Euro and the dollar weakened to 1.2280 in early Europe.
The US economic data was stronger than expected with the ISM index for the manufacturing sector rising to 62.8 in May from 62.4 the previous month. The employment index was also very strong, rising to the highest level for 31 years. There was also evidence of bottlenecks with the supplier deliveries index rising strongly. The short-term strength of the economy will be offset by further concerns over the possible damage caused by high oil prices. The dollar is still struggling to take advantage of strong data as sentiment has deteriorated and this will maintain unease that the dollar will also fail to take advantage of a strong US employment report on Friday.
The dollar will also be undermined by security concerns, with high oil prices adding to the defensive qualities of European currencies. The ECB is likely to keep interest rates on hold on Thursday.
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