Thursday June 17, 2004 - 14:14:28 GMT
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GVI FOREX: MONTH AHEAD DOLLAR OUTLOOK
Recently dollar trade increasingly has become driven by interest rate expectations and thus the focus has centered on where Fed Chairman Greenspan is directing policy sentiment. To get one step ahead of the markets traders now must anticipate what his policy guidance will be. Actual changes in official rates have become a lagging indicator of policy. Thus the markets tend to look now to eurodollar and Fed Funds futures as current policy. The markets have settled in now firmly on a 1.25% fed funds rate at the end of June and expect rates to rise steadily over the year and wind up in the vicinity of 2.25% or 2.50% at the end of the year. That forecast is certainly going to change in coming months.
The key predictor of what official policy guidance will be is now the outlook for inflation. The markets currently feel that a rise in rates to the 2.25-2.50% level or above should be sufficient to maintain dollar stability. It is unclear at this juncture whether it will be able to trade higher unless the expected path of tightening quickens. On the other hand, the dollar is vulnerable to any upcoming suggestions that the Fed will not be tightening along this predicted path. Thus the bottom line is that the markets will increasingly focus on the various official inflation indices, while continuing to use the employment data series as the major barometer of the strength of the economy. Of course terrorism, or possible threats to the steady flow of middle east remain the wild cards.
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