Monday May 23, 2005 - 10:13:21 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar takes advanatge of Euro fears
The dollar strengthened through 1.2580 against the Euro on Friday which propelled the US currency to a high close to 1.2530 on a combination of stop-loss buying and momentum buying. The dollar retained a form tone in early Europe on Monday.
Euro-zone data offered no significant Euro support on Friday with a disappointing 0.2% French GDP increase for the first quarter. Confidence in the Euro-zone economy will remain weak in the short term and there will also be political concerns this week. The opinion polls still point to a narrow French rejection of the EU constitution in this Sunday's referendum and there is also the prospect of early federal elections in Germany following a heavy state government defeat. It is, however, possible that the German election, which the Chancellor is aiming to hold in the Autumn, will eventually be seen as positive for the Euro.
Dollar confidence will remain stronger in the short term on optimism over the US economy with the prospect of widening US yield support boosting demand for the US currency, although the principal boost may come from fears of financial difficulties in major hedge funds. There will be further speculation that hedge-fund loses and redemption pressures will force a liquidation of positions financed through shorting the dollar. This could push the dollar sharply stronger, although this is not the most likely outcome. The lack of significant data over the next 48 hours will ensure a further focus on interest rates ahead of the Fed minutes on Tuesday.
The latest IMM data recorded an increase in short Euro positions of close to 12,000 contracts in the latest week, increasing the short total to around 13,500 contract. This positioning will start to be a significant barrier to further short-term dollar gains. There is also a substantially larger long dollar position as a whole in the market, certainly in comparison with the past two years, which will curb US currency gains. There is also the risk that longer-term dollar reserve selling will increase at current levels and this will tend to cap US currency gains.
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