Monday August 22, 2005 - 09:49:34 GMT
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INVESTICA Ltd - www.investica.co.uk
Technical trading to domiante
The dollar strengthened to a high of 1.2130 against the Euro on Friday, but was unable to break this level on two occasions and the US currency weakened back to 1.2160 in New York. The dollar weakened to 1.2180 in early Europe on Friday as trading remained tentative with low liquidity levels. Technical trading will tend to dominate initially.
There was no economic data on Friday and there is also no significant fresh US information on Monday. Markets are still looking for further US interest rate increases which will underpin near-term dollar confidence. On Friday, Fed Governor Lacker stated that he was less confident over the inflation outlook. In the short term, markets will see any increase in inflationary pressure as likely to push up interest rates and will also tend to consider this as dollar positive. The longer-term implications would be less positive for the dollar, especially if higher inflation is triggered by rising energy prices, as the economy could start to slow sharply. Overall, the economy and dollar are likely to be increasingly vulnerable if there is evidence of rising inflation at the same time as weakening growth. In this context, the dollar could start to be driven more by the Wall Street performance over the next week.
The latest IMM data recorded a drop in long Euro position of over 3,500 contracts in the latest week and the position is now very close to balance. This will increase the risk of range trading in the short term. The overall market positioning showed a short dollar position for the first time in four months, lessening the risk of a sharp near-term dollar retreat.
The Euro-zone current account recorded a small EUR2.5bn deficit for June. There were strong inflows of investment flows, but this was offset by sharp outflows of other capital. The net implications are slightly positive for the Euro.
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