Tuesday May 31, 2005 - 11:27:21 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar takes advantage
The Euro lost support at 1.2450 in Asia on Tuesday and this pushed the Euro down to a low of 1.2315. The convincing break below 1.25 against the US currency will reinforce negative Euro sentiment and will raise speculation over a move towards the 1.20 level in the medium term.
The bigger than expected no vote in France will continue to unsettle the Euro in the short term as it will lead to a prolonged period of political uncertainty. The risks will be magnified if the Dutch also reject the constitution on Wednesday. The longer-term developments could certainly be positive for the Euro-zone as governments are forced to tackle underlying weaknesses while the existing constitution will continue for now. Euro sentiment will still be damaged in the short term and the near-term risks will increase if political pressure on the ECB and calls for lower interest rates intensifies. There will also be further near-term concern over the Euro-zone economic data.
The US economic data will be important this week, especially with payroll data on Friday. The data will need to show significant weakness to undermine near-term market confidence in the dollar. The extent of longer-term dollar selling will be important for the US currency. If central banks take advantage of dollar gains to sell the US currency, the dollar rally is liable to stall quickly and there could be a rapid US currency retreat. If the central banks decide to wait, the US currency will be in a stronger position to secure further near-term gains.
The latest IMM data recorded an increase in short Euro positions of over 1,000 in the latest week, pushing the total to over 15,000 and the largest short Euro position since 2000. Although the shift in interest rates mean there is now a positive carry on dollars which makes it easier to hold dollar positions, the number of short Euro positions suggests that caution is still required, especially as there has been a sharp increase in wider dollar long positions against the major currencies. In these circumstances, there will be the threat of a sharp dollar correction weaker.
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