Wednesday June 16, 2004 - 09:30:15 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar range trading likely
The dollar's reaction to the economic data and Greenspan's comments reinforces the view that the dollar will face tough resistance below the 1.20 level on a medium-term view as an aggressive Fed tightening had been priced in and expectations will have to be adjusted slightly. The extent of long Euro positions means that long Euro will struggle to push above the 1.2150 level for now.
The dollar held close to 1.2050 ahead of the Tuesday CPI release and the dollar weakened in New York to a low of 1.2160 before recovering slightly in early Europe on Wednesday.
The headline consumer price index rise was higher than expected at 0.6%, but the core increase was marginally below expectations at 0.2%. Fed Chairman Greenspan took a more moderate stance than feared by the market, stating that inflationary pressure was unlikely to be serious and that the interest rate rises were likely to be gradual. These two factors combined have dampened exchange rate expectations and have weakened the dollar. The market response suggests that the dollar had priced in a 0.5% rate hike at the end of June while the more likely outcome is that there will be a 0.25% increase. The shift in expectations will make it difficult for the dollar to make strong gains.
There are still a high number of long speculative Euro positions in the market and this will make it difficult for the Euro to make strong gains.
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