Wednesday May 25, 2005 - 09:53:52 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro still looking for good news
The Euro strengthened to 1.2625 against the US currency during Tuesday, but was unable to sustain these gains.
The Fed minutes from the May 3 FOMC interest rate meeting were broadly in line with expectations and failed to offer significant direction. The Fed expressed some concerns over an incremental rise in inflation, but the some members also expressed some doubts over growth. Overall, there was evidence of uncertainty within the Fed which is being translated into market uncertainty and caution. Nevertheless, the clear indications were that the Fed is expecting the measured tightening to continue which will offer underlying dollar support on yield grounds. The US data offered some dollar support with a 4.5% increase in existing home sales to 7.18mn and short-term yield considerations will offer some support to the dollar. Long-term yields have fallen, however, which will tend to reduce near-term dollar buying slightly. The OECD also expressed some concerns over US growth and warned that the risks of a sudden dollar drop on current account deficit fears had increased. The underlying structural vulnerability should not be ignored.
Confidence in Euro-zone growth will remain weak after a downgrading of OECD growth forecasts and weak data on Tuesday. The OECD cut the 2005 GDP forecast to 1.2% from 1.9% and called for lower interest rates. The German IFO index also weakened to 92.9 in May from 93.3 the previous month. Political concerns will tend to hurt the Euro ahead of the French referendum vote on Sunday, although there is a significant chance that the Euro will rally once the vote has been completed even if the new constitution is rejected.
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