Friday June 10, 2005 - 10:08:46 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces trade test
The Euro was unable to make any significant headway against the US currency and weakened to below 1.22 after Greenspan's comments before recovering back to 1.2225 in late New York. The dollar held a firm tone in early Europe on Friday at just weaker than 1.22 against the Euro.
Fed Chairman Greenspan stated that the US economy was on a firm footing in his congressional testimony on Thursday. He also stated that he expected interest rates to continue to rise at a measured pace. These comments will dampen immediate speculation over a pause in the Fed tightening process, which had started to gain ground over the past week, and this shift in expectations will offer some dollar support. Markets will be looking for US rates to increase to at least 3.5%, although the forthcoming data will also need to be watched closely as speculation over a pause in tightening will increase again if there is any deterioration in growth indicators. Confidence in the US economy should remain relatively firm, although there will still be longer-term concerns over such issues as the housing sector after Greenspan warned over local housing bubbles and speculative price increases. These longer-term factors should certainly not be ignored, but the immediate impact should be limited.
The US trade deficit report will be important for the markets on Friday, especially as the deficit fell sharply last month. A lower than expected deficit today would boost optimism over a sustained improvement in the deficit while a sharp monthly increase would revive market concerns over a rising shortfall. In particular, a deficit back above US$60bn would provide an important test of the market's dollar confidence.
The Euro is still not in a good position to benefit from any dollar vulnerability given the lack of confidence in political and economic developments. The German consumer inflation data recorded a drop in the annual rate to 1.4% and this will maintain speculation that the ECB has scope to cut interest rates. The French industrial production data was also slightly weaker than expected.
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