Thursday August 25, 2005 - 10:04:09 GMT
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INVESTICA Ltd - www.investica.co.uk
Long-term dollar risks?
The dollar weakened after the durable goods data and trading was choppy. The dollar fell to a low of 1.2275 and, after a rebound to 1.2235 triggered in part by hedge-fund buying, the dollar weakened back to 1.2270. Trading patterns in Asia were similar with the dollar weakening to 1.2310 in early Europe on Thursday before a slight recovery after the German IFO index.
The durable goods report recorded a sharper drop than expected with orders falling 4.9% in July after a revised +1.9% increase in June. There was also a 3.2% underlying decline in orders while non-defence capital goods orders fell 7.3%. The drop did, however, follow a series of strong monthly reports and the underlying economy is still strong at this stage. The housing data remained strong with new home sales rising 6.5% to 1.41mn, illustrating continuing strength in the property sector. Overall confidence in the economy should remain firm in the short term and Fed Governor Moskow stated that US interest rates would need to rise further. There are, however, considerable longer-term risks to the economy with an initial focus on oil prices.
Oil prices strengthened on Thursday, reaching highs above the US$68 p/b level in Asian trading. Prices at this level will offer medium-term dollar risks. There will be a growing risk that consumer and business spending will be damaged by the increase in energy costs while headline inflation will be pushed up. There is likely to be greater market speculation over stagflation which will tend to undermine the US currency and could result in substantial dollar losses, especially if there are heavy falls on Wall Street. There is evidence of some flows away from Brazilian and Mexican markets which will offer some near-term support to the US currency. The longer-term implications of a sustained increase in risk aversion will be less benign for the dollar.
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