Friday August 12, 2005 - 10:14:33 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces vital trade test
The dollar struggled to secure any significant support during Thursday and drifted lower with a move to 1.2470 in New York with a slightly weaker bias in early Europe on Friday ahead of the potentially very important trade data.
The headline retail sales increase was strong at 1.8%, but was slightly weaker than market expectations while the underlying rate was also below forecasts at +0.3%, although spending patterns were still firm. Sales were inflated by very strong car sales due to aggressive incentives and this is liable to weaken future sales. The jobless claims data remained strong, however, with a drop to 308,000 in the latest week from 314,000 previously. The labour-market strength will offer short-term support to US spending and market expectations of further interest rate increases will remain strong.
The US trade deficit will be a very important focus on Friday with fears that the deficit will resume the widening trend, reinforcing the dollar's structural vulnerability. The markets have, however, probably discounted a slightly disappointing figure and the dollar could therefore, rally on a deficit near of just below expectations. The dollar will, however, face a tough test if the deficit rises to or above the US$60bn level. Summer trading conditions can be erratic and the yield considerations could still return to offer considerable dollar support given low liquidity over the next two weeks.
The Euro-zone data was close to expectations with a second-quarter increase of 0.3% and did not have a significant impact. There were, however, strong variations between countries which could cause some medium-term stresses. The ECB remains confident over a gradual up-turn in growth and is unlikely to cut interest rates in the short term. Overall confidence in the Euro-zone will remain slightly stronger which will offer background Euro support.
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