Wednesday May 11, 2005 - 10:01:09 GMT
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INVESTICA Ltd - www.investica.co.uk
Trade report holds dollar key
The dollar drifted weaker against the Euro during Tuesday due to caution ahead of the US trade report and the US currency weakened to 1.2880 in New York with little change in early Europe on Wednesday.
The dollar was undermined to some extent on Tuesday by a 100-point decline on Wall Street. There were also some rumours of difficulties within a prominent hedge fund which undermined the US currency. The dollar will certainly be vulnerable if there is evidence of financial difficulties at a major institution and there may be a greater mood of caution in the short term, but attention is likely to return to the economy unless there are any major developments.
The US trade report on Wednesday will be potentially very important for the US currency. The underlying market is close to balance at present with the weak structural US position and strong Euro-zone balance of payments position offset by firm US growth and weak Euro-zone growth conditions. The conflicting pressures were illustrated by the strong German trade surplus reported on Tuesday. In this context, the strong payroll report last week helped strengthen the dollar's near-term position. Any evidence that the US imbalances are deteriorating would increase the risk of a renewed loss of dollar confidence, potentially leading to significant losses. A deficit below US$60bn would, however, allow markets to focus on growth differentials and this would offer near-term dollar relief.
The US retail sales report will also be significant on Thursday as it will have implications for confidence over growth conditions. Fed Governor Poole, for example, stated that retail sales growth may have been strong in April. A strong figure would boost optimism that the weak March data was due in part to seasonal considerations on an early Easter, while a weak figure would reinforce concern that the economy is deteriorating.
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