Monday June 20, 2005 - 10:14:00 GMT
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INVESTICA Ltd - www.investica.co.uk
US deficits must not be ignored
The Euro strengthened significantly during Friday as confidence was undermined by the US current account deficit although the prime factor involved was probably a covering of short Euro positions. The Euro strengthened to highs just above 1.2280 against the US currency, but the Euro weakened again in Asia on Monday. Oil prices will remain an important focus in the short term with prices pushing to near US$60 p/b in Asia on Monday. The net risks will be slightly negative for the US currency on fears over US trade.
The US current account deficit increased to a record US$195bn for the first quarter of 2005 compared with an upwardly revised US$188.4bn deficit for the fourth quarter of 2004. The deficit at over 6% of GDP illustrated the extent of the underlying US deficit and the capital account figures were also disappointing with a further outflow of direct investment. With official dollar buying lower, the US is now more dependent on private-sector inflows to avoid downward pressure. Although there is greater confidence in capital inflows being maintained, there will be unease over the underlying situation.
The University of Michigan consumer confidence index increased more than expected to 94.8 in June from 86.9 the previous month as energy prices fell. The impact is, however, liable to be short-lived, especially as oil prices have strengthened again. The dollar will still gain support from yield considerations, but the dollar will be more vulnerable to any deterioration, especially as high oil prices will increase the potential for a pause in US Fed tightening.
EU political and economic concerns will persist and this will severely limit the potential for Euro recoveries. EU governments failed to reach agreement over the budget over the weekend and confidence will remain very fragile in the short term, especially as the governments will be happy to see a weak Euro.
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