Wednesday July 27, 2005 - 10:12:24 GMT
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INVESTICA Ltd - www.investica.co.uk
Durable dollar support?
The dollar strengthened to a high of 1.1980 against the Euro before drifting back to 1.2020 in late New York as the US data curtailed bullish dollar sentiment. The Euro was, however, unable to make any significant headway and the dollar was holding just stronger than 1.20 in early Europe on Wednesday.
US consumer confidence dipped to 103.2 in July from 106.2 the previous month, contrary to expectations for a small increase, with the current conditions and expectations components both weakening. Confidence is still at historically high levels, but there will be some unease over the impact of high oil prices. These concerns are liable to increase if there is a disappointing durable goods orders report on Wednesday. Overall confidence should, however, remain strong in the short term and there will probably need to be a series of weak reports to trigger a sustained deterioration in US economic sentiment.
Yield support will remain intact in the short term with expectations of a further Fed rate increase in August. US 10-year spreads are also holding close to 100 basis points above German bund levels and this will maintain short-term support for the US currency, especially if global risk aversion levels remain low. It is, however, the case that the dollar will be very vulnerable if there is a sustained deterioration in US economic data and a shift in interest rate expectations. The second-quarter GDP figures on Friday will be important for the markets and trading will become more cautious ahead of the data. It is unlikely that the Fed's Beige Book will have a significant impact on short-term rate expectations, but any suggestions over a slowdown could raise expectations that there could be a pause after the August meeting.
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