Thursday August 18, 2005 - 10:13:46 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro on the defensive
The dollar managed to push through the 1.23 level against the Euro and, although the performance was not entirely convincing, the dollar reached a high of 1.2260 in New York. The dollar has also pushed through 1.2250 in Europe today, increasing the chances of further short-term dollar gains
US producer prices rose more than expected in July, with a headline increase of 1.0% double the consensus estimate. Energy prices rose strongly, but the underlying increase was also stronger than expected at 0.4%. The impact will be limited by the fact that inflation at the consumer level still appears under reasonable control, but there has been a shift in interest rate expectations. The markets are now giving a small chance of a 0.5% rate increase at the September Fed meeting to 4.0%.
Interest rate considerations will, therefore, support the dollar in the short term. Ironically, however, the US currency also gained some support in New York from lower oil prices as they dipped to below US$ 64 p/b, illustrating the mixed impact of high energy prices on the US currency. Overall, although high inflation indicators are offering dollar support, the net risks of high energy prices are likely to be dollar negative in the medium term. The Fed will be constrained in lifting interest rates if the economy starts to weaken on a drop in consumer spending. High oil prices will also increase the risk of Middle East central bank selling.
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