Wednesday June 1, 2005 - 09:51:14 GMT
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INVESTICA Ltd - www.investica.co.uk
No Euro relief
The Euro has remained under pressure and dipped to 1.2250 against the dollar after rumours of discussions over EMU failure between the ECB and German Finance Ministry.
The US data had a mixed bias, but the net implications were slightly worrying for the US currency. The consumer confidence index strengthened to 102.2 in May from 97.5 the previous month. The Chicago PMI index, however, weakened to 54.1 in May from 65.6 the previous month while the orders and employment components were also disappointing, with the employment index below the 55.0 level. The data will raise some concerns over the industrial sector and may also suggest that trade deficit could be subjected to fresh upward pressure if consumer spending remains strong. These fears will increase if the national ISM index is weak on Wednesday and could start to erode dollar confidence, although the US currency should prove relatively resilient for now given the focus on Europe.
For now, the Euro-zone difficulties will remain the dominant factor with further unease over the Euro-zone political outlook if the Dutch vote heavily against the EU referendum. There is virtually no chance that there will be a yes vote and the political response will then be important for the EU and Euro. There will be doubts over an effective response and fears that the new French Prime Minister Villepin will not be able to reform the French economy or bring about the necessary political adjustments. There is the potential for longer-term optimism, but this is unlikely to emerge in the short term.
The economic data failed to offer Euro support as the PMI index weakened to 48.7 in May from 49.2 in April as there was a further deterioration in France and Italy. There will also be speculation over longer-term Euro selling by institutions which will offer significant near-term dollar support. If the Euro stabilises, there may be central bank reserve diversification into the Euro which would offer some near-term currency support, but Euro confidence has been seriously damaged.
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