Wednesday June 9, 2004 - 21:06:04 GMT
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GVI MONTH AHEAD DOLLAR OUTLOOK:
Just as the markets were stating to become complacent with a measured pace of Fed tightening, Chairman Greenspan raised some new uncertainties in the markets by expressing his concerns about inflation in a speech by satellite to London on Tuesday. Increased concerns about price pressures imply a more aggressive Fed tightening path than the markets were expecting. Changed expectations in this direction would be constructive for the dollar. Nevertheless, the dollar still has a number of issues still to overcome. Oil supply questions have not been resolved yet to the satisfaction of market participants. First of all, there are questions about how much of an impact the recent increase in supply quotas will have on prices and energy availability in the short and medium term. The answer to this question can only come from how spot oil prices perform. The second nagging question relates to how terrorism might impact availability in the future. This issue pertains to the petroleum delivery infrastructure and the security of some oil producing states. The U.S. and dollar are seen as vulnerable to adverse news on the oil front.
As for the price action in forex markets, this is a market clearly lacking in fundamental convictions, as the trading scenario seems to change nearly every day. Oftentimes when the markets are adrift, as they seem to be at the moment, the interpretation of news can be turned on its head to suit the most recent price action. In the end forex all boils down to capital flows. Money seeks out the safest, highest return it can find. So the interplay of short and long term interest yields and equity prices will continue to be key. The dollar can only stage a sustained rebound when the markets become convinced that equities are in for a long-term advance, or short term interest swing back to a significant advantage against the euro. Until then the markets should remain inherently unstable.
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