Monday May 2, 2005 - 10:04:20 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro-zone fears protect dollar
The US data was mixed on Friday, but offered some support to the US currency. The personal income and spending increases were marginally above expectations and the Chicago PMI index was stronger than expected at 65.6 for April from 69.2 the previous month, with firm readings for the orders and employment components. There were also reports that the New York manufacturing index was wrong and this could be significant given that the sharp slowdown reported in the data had raised fears over the economy. There will still be speculation over a slowdown in the US economy and the data this week could be significant. Lower oil prices will offer some support to the US dollar, especially as it may alleviate the pressures on consumer spending.
The PCE inflation indicator recorded a rise in the personal spending data with the underlying rate increasing to 1.7% from 1.6%, but the rise was in line with market expectations and the employment cost index was lower than expected at 0.7%. Overall, the data has not strengthened the case for a more aggressive Fed stance and there is a high probability of a 0.25% rate increase. There is, however, the possibility that the Fed will decide on a removal of the term measured. This will raise speculation over a more aggressive Fed stance and would offer near-term dollar support, although it may in fact be more an indication of the Fed aiming to secure extra flexibility rather than signalling a faster pace of rate increases.
Asian currency policies will remain important with continuing speculation over a yuan revaluation. The dollar will be vulnerable if there is more general downward pressure on the US currency, but the medium-term implications of stronger Asian currencies would help alleviate the upward pressure on the Euro that has been seen over the past two years. The shorter-term impact should be broadly neutral or possibly slightly dollar negative.
The latest IMM positioning data recorded a small decline in long Euro positions of around 800 with the total long position down to near 4,000. The number of long positions at this level will not have a major impact on the markets. The overall reduction in short dollar positions will still make it difficult for the US currency to secure strong gains.
Confidence in the Euro-zone economy will remain subdued and confidence will be dampened further by the Warren Buffet comments that he was less enthusiastic over Euro investments, although he appears to be retaining his overall short dollar position. The Euro-zone economic data remained weak with the PMI index for the manufacturing sector weakening to 49.2 in April from 50.4 the previous month.
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