Thursday May 12, 2005 - 09:56:56 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar looks for retail confirmation
The dollar was little changed ahead of the US trade data on Wednesday despite a brief security scare in Washington. The dollar gained sharply after the US trade data, pushing beyond 1.28 and the dollar retained a firm tone in early Europe on Thursday, strengthening through the 1.2770 level.
The US trade deficit fell sharply to US$55.0bn in March from US$60.6bn the previous month with a 1.5% increase in exports and a 2.5% drop in imports. Oil imports were at record levels after a monthly jump, but there were strong gains in aircraft exports. There will be some doubts over the data, especially as seasonal adjustment may have again been faulty due to the timing of Easter. The figures next month will, therefore, be important to see if there is a sharp widening in the deficit. The narrower deficit will, however, support near-term market confidence in the dollar as the trade deterioration has been an important factor weakening the dollar. There will also be upward revisions to first-quarter GDP estimates which will help ease fears that the economy is slowing sharply.
The more positive dollar mood will be reinforced by a larger than expected US$57.7bn budget surplus for the month. The combination of favourable budget and trade data will ease immediate concerns over the twin US deficits, but the fact that personal savings rate is close to zero will remain a negative medium-term factor for the US currency.
There will be some concerns that the trade deficit improvement was due to a slowdown in domestic spending, which would tend to be regarded as negative for the US currency, and this will increase the importance of today's retail sales data. A strong report would increase optimism that the March slowdown was short-lived while a weak figure would revive fears over consumer spending levels and the economy as a whole.
The German GDP figures for the first quarter were stronger than expected, but this is unlikely to have a major impact with Euro-zone confidence generally weak. From a medium-term perspective, the degree of longer-term dollar buying around current levels will be very important for the markets as Asian central banks seek to lower their dollar exposure. The evidence from the past 24 hours suggests that the Euro would not gain any significant support against the dollar from any yuan revaluation.
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