Monday April 25, 2005 - 10:01:20 GMT
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INVESTICA Ltd - www.investica.co.uk
Markets hoping for clarity
The dollar secured slightly calmer conditions against the Euro on Friday, resisting a further attack on the 1.31 level, although it failed to make strong headway. The dollar fared less well against the yen and these trends continued on Monday. The dollar strengthened against the Euro in early Europe on Monday, supported by Euro selling against the yen, and strengthened to 1.2970.
The US economic data this week will have an important impact, especially as recent indicators have been contradictory. Investors are unsure over growth and inflation prospects in the US and any apparent clarification from data this week will be important for interest rate expectations and the US currency. In particular, the consumer confidence and GDP data will be important for market sentiment. On Friday, Fed Governor Kohn stated that measured rate increases were still likely and the Fed will continue to push interest rates higher. Any evidence of weakening growth would, however, undermine the potential for dollar support even if Fed tightening continues on inflation concerns. Energy and oil prices will also be important, with any combination of higher oil prices and weakening equity prices likely to undermine confidence over US growth prospects. The US currency also has reduced support on long-term yield grounds which will hamper the potential for a dollar rebound.
The latest IMM positioning data recorded a small decline in long Euro positions of around 700 in the latest week, cutting the net long position to around 5,000. The overall implications of the Euro positioning data is limited, but there has been an overall increase in long dollar positions to near 1-year highs and this will make it difficult for the US currency to make near-term gains. There is certainly less scope for a covering of short dollar positions and the dollar will, therefore, need underlying buying to make headway. The fact that the dollar has been weakening despite an increase in speculative dollar positions will cause unease over medium-term trends even if there is a near-term dollar rally.
The German IFO index weakened to 93.3 in April from 94.0 the previous month. This will maintain doubts over the Euro-zone economy, but a significant reaction is unlikely as confidence over the economic area is already very fragile.
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