Monday August 15, 2005 - 10:00:02 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar looks for correction
The dollar weakened to 1.2485 against the Euro ahead of the US trade data on Friday. The dollar managed to rally after the data and temporarily pushed to 1.2385 against the Euro before weakening back to 1.2450. Trading was erratic due in part to the breakdown of the EBS electronic trading system and the dollar secured a firmer tone on Monday, primarily due to profit taking on long Euro positions, with the dollar pushing to 1.2395.
The June US trade deficit rose to US$58.8bn in June from US$55.4bn the previous month. Exports were little changed while there was a 2.1% increase in imports. For the first half of 2005, the deficit rose to US$342.9bn from US$290.9bn the previous year, emphasising the underlying deterioration. There was an increase in the monthly oil deficit to US$17.9bn and there will be further concern the sharp rise in oil prices will put further upward pressure on the deficit over the next few months.
The University of Michigan consumer confidence index dipped to 92.7 in early August from 96.5 in July and there will be concern that confidence will be undermined by high energy prices. This trend will be important if it starts to undermine consumer spending as this could start to slow the economy sharply and lessen the potential for further interest rate rises. This will pose a serious potential longer-term threat to the dollar. In the shorter term, the US currency will still be in a position to gains support from yield considerations as the Fed is still looking to increase interest rates in September.
The latest IMM positioning data recorded a modest increase in long Euro positions of close to 4,000 in the latest week with the total just above 4,000. This was the biggest long Euro position since May and, although the impact should still be limited as it is not a large position, this will limit the scope for further Euro gains.
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