Monday June 7, 2004 - 09:58:04 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar sentiment remains weak
The dollar's inability to rally on the strong employment data will reinforce negative sentiment and there is the risk of further near-term selling pressure. There is the potential for a medium-term dollar move to 1.25. Nevertheless, there is an increasing risk that the Euro is over-extended with long Euro positions offering little immediate value beyond 1.2350.
The dollar was unable to sustain initial gains on the employment report and weakened back towards 1.23. The dollar extended losses to a low of 1.2335 in early Europe on Monday, the weakest level since early April.
The employment report was stronger than expected with non-farm payrolls rising by 248,000 in May. More significantly, the previous two reports were revised up with total growth for the past three months of close to 950,000. There is a high probability that the Fed will increase rates by 0.25% at the end of June.
The difficulty for the dollar is that a gradual rate hike has been priced in and there was some disappointment over comments from Fed Governor Kohn that measured approach is justified and that inflationary pressure is under control. The markets are now starting to fret that the Fed may be behind the curve and needs to tighten more aggressively. Favourable inflation developments, including a decline in oil prices, would offer near-term support to the US dollar.
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