Wednesday August 10, 2005 - 10:03:46 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed decision fails to boost dollar
The dollar traded in relatively narrow ranges ahead of the US Federal Reserve decision on Tuesday. The US currency failed to make any headway after the Fed decision with a softer bias on Wednesday.
The US Fed decision was as expected with a rise in the fed funds interest rates of 0.25% to 3.5%. In the statement, the Fed stated that spending appeared to have strengthened while the labour market was firm. The Fed stated confidence over the longer-term outlook, but also suggested that pressures on inflation remained elevated. The Fed kept the commitment to removing the monetary stimulus at a measured rate. The Fed is, therefore, clearly expecting to increase interest rates again in September. The labour cost data within the productivity figures suggested that wage costs were under reasonable control, but that there is no room for complacency.
Markets had been looking for a tough stance from the Fed and there was some disappointment that the Fed did not voice greater concern over inflation. Market forecasts of the level of interest rates are still likely to be pushed up in the short term and this shift in expectations will tend to offer some dollar support over the next few weeks.
The market reaction will be important during Wednesday. If the dollar fails to rally on rate expectations, there will be more concerns over longer-term losses and selling pressure could increase. The US currency will also be vulnerable to structural concerns and the trade deficit will be an important focus over the next 48 hours ahead of the monthly data on Friday. The Euro will still be in a position to gain underlying support from structural buying.
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