Friday May 6, 2005 - 10:04:22 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces payroll test
The dollar recovered from lows near 1.30 against the Euro during Thursday and the US currency traded close to 1.2950 in New York after failing to push through 1.2925. The Dow Jones index was subdued and the markets were slightly disappointed by the downgrading of GM and Ford. The dollar was little changed in early Europe on Friday as caution prevailed.
The US jobless claims figures were higher than expected at 333,000 from 322,000 the previous week which may undermine confidence slightly over the payroll data on Friday. The payroll report will inevitably be important for the markets, especially as it will have a crucial impact on near-term interest rate expectations. Markets are looking for a figure close to 170,000 and a figure nearer 100,000 would further erode speculation over a more aggressive Fed stance on interest rates. This would be likely to maintain the risk of downward pressure on the US currency. Any figure around 200,000 would be likely to stabilise interest rate expectations, but a very strong figure will be needed to generate strong dollar buying interest.
The overall forces on the dollar should be close to balance as the short-term interest rate differentials will still move in the dollar's favour. There is also still the potential for some liquidation of short dollar positions which have been used to fund carry trades. In this context, the dollar might be able to avoid heavy losses on a poor payroll figure as global growth fears would be likely to increase, although volatility would be high.
Political fears surrounding the Euro should continue to ease very slightly in the short term. The Asian currency developments are also likely to be important for the Euro. Any upward pressure on Asian currencies, triggered by a Chinese policy change, would be likely to ease underlying upward pressure on the Euro.
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