Friday June 17, 2005 - 09:52:25 GMT
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INVESTICA Ltd - www.investica.co.uk
Weak Euro correction
The dollar had a slightly weaker tone during Thursday, but the Euro still found it difficult to take full advantage. The Euro briefly strengthened through the 1.2150 level, but failed to hold the gains and retreated back to 1.21 in late New York with little change in early Europe on Friday.
The US jobless claims and housing starts data were marginally weaker than expected with claims rising to 333,000 while housing starts were marginally stronger at 2.00mn. The Philadelphia Fed manufacturing index was significantly weaker than expected with a decline to -2.2 in June from +7.3 the previous month and this was the first contraction in the index for 25 months. The orders component was weak, but there was a recovery in the employment component. The index will still tend to unsettle the dollar to some extent as it will tend to push interest rate expectations down.
The current account data will be watched closely on Friday even though the stronger dollar tone has reduced the most immediate market concerns over the deficit issue. The income and invisibles accounts will be closely watched to assess the underlying balance of payments trends. A quarterly deficit above US$200bn would force markets to focus on the issue more closely again and the underlying position is still precarious. There is still considerable underlying dollar vulnerability on the current account deficit issue, especially if capital inflows appear to be faltering.
EU leaders have struggled to make any significant political progress at the EU summit and Euro sentiment will inevitably remain fragile. For now, markets are seeing high-yield investments as attractive and there has been a flow of funds into high-yield currencies. There has also been evidence that the Euro is now being used as a funding currency rather than the dollar, especially with Euro sentiment so fragile and Euro interest rates 1% below dollar levels. This has been fuelled in part by further upward pressure on commodity prices. There will, however, also be concerns over the apparent slowdown in growth and this could lead to a sharp correction in high-yield currencies.
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