Monday July 25, 2005 - 10:06:43 GMT
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INVESTICA Ltd - www.investica.co.uk
Underlying Euro support
The markets were slightly less volatile on Friday and the US dollar found support at 1.2180 against the Euro before strengthening to 1.21. The dollar extended gains in late New York on Friday with a move to 1.2060 and was little changed in early Europe on Monday, although the US currency initially had a firm bias before retreating.
Yield spreads will remain important after the yield on 10-year US Treasuries pushed to above 100 basis points over German bunds at the end of last week. As the market attention over the Chinese yuan fades to some extent, the attention will tend to switch back to the US fundamentals. Confidence over the economy should remain firm in the short term and there will also be expectations of further US Federal Reserve interest rate increases with the probability of a 0.25% increase in August. This combination will support the dollar, although the Chinese move will also tend to increase the risk that the dollar will be sold more aggressively if concerns over the US economy increase.
The latest IMM data recorded a relatively small increase in short Euro positions of around 4,000 contracts in the latest week, increasing the short position to near 12,000. This suggests that positioning is not extreme, but will be a modest barrier to further dollar gains.
There is the potential for further central bank buying of Euros close to the 1.20 level and the net risks suggest the Chinese move will increase the potential for underlying diversification away from the US currency, particularly from Asian central banks. This underlying trend should offer Euro support close to current levels.
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