Wednesday August 17, 2005 - 10:12:07 GMT
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INVESTICA Ltd - www.investica.co.uk
Markets target Euro
The dollar was unable to break 1.23 against the Euro on Tuesday and was unsettled slightly by weakness on Wall Street, but the US currency pushed ahead again in Asian trading on Wednesday with a test of Euro support below the 1.23 level. The Euro was undermined to some extent by renewed selling against the yen and markets will aim to attack the Euro as liquidity remains low.
The headline increase in consumer prices was larger than expected with a 0.5% rise in July as energy prices rose 3.8%. The underlying increase, however, was weaker than expected with a 0.1% increase. The Congressional Budget Office (CBO) budget estimate was lowered to US$331bn for the current year from the previous US$365bn estimate which supported sentiment. Near-term confidence in the economy should remain firm.
The data overall should also keep the Fed on its current tightening policy in the short term and this vie is unlikely to be jolted by today's producer price data. US equity markets were, however, unsettled by reports of weak consumer spending from major US retailers and this weakness could pose a longer-term threat to the dollar if spending falters significantly, especially if oil prices remain high. If consumer spending does falter, the Fed will have to consider a pause in the tightening process.
The yield curve has continued to flatten with 2-year yields now only 19 basis points below 10-year yields, the lowest margin for over four years. This will increase fears that the yield curve will invert, potentially signalling a substantial weakening of the economy.
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