Thursday June 23, 2005 - 09:48:15 GMT
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INVESTICA Ltd - www.investica.co.uk
Rate speculation difficult to contain
The Euro weakened to lows close to 1.2110 against the US currency, but the dollar was unable to push through this level and was little changed in New York. The dollar was also little changed in early Europe on Thursday before attempting a fresh rally beyond 1.21 against the Euro. The dollar has been able to make some progress against high-yield currencies which will offer wider support to the dollar against the Euro. Underlying uncertainty over trends will tend to lead to choppy and indecisive trading.
Interest rate comments have tended to dominate over the past 24 hours with a series of comments from European officials. Bank of France Governor Noyer again stated that rates were already at a very low level and other ECB officials talked down the possibility of a further rate cut, questioning whether a reduction would be beneficial or justified. The markets will, however, still be looking for lower European interest rates and this will tend to maintain the risk of Euro selling. Yield spreads will also offer support to the US currency with the spreads on 2-year bonds rising to 165 basis points above German bunds.
Attention will edge back towards the US currency even though the US data should not have an important impact on Thursday. There will be further expectations of a US interest rate increase at the FOMC meeting next week. There will, however, be concerns that high oil prices will undermine US spending and that a general weakening of growth could halt US rate increases within the next two months. Given the structural weaknesses, the dollar will be vulnerable if it appears that US interest rates have peaked.
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