Friday September 2, 2005 - 09:37:31 GMT
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INVESTICA Ltd - www.investica.co.uk
Where next for the dollar?
The dollar was unable to hold support at 1.2350 against the Euro and this weakened the dollar to near 1.24 ahead of the US data on Thursday. The ISM data generated another big move, 24 hours after the dollar's sharp drop after the Chicago index. The ISM index fell to 53.6 in August from 56.6 the previous month with orders and employment subdued while prices were high on rising energy costs. The report will further damage near-term confidence in the US economy. The dollar fell to 1.25 and weakened further to 1.2560 in Europe on Friday.
There has been a further significant shift in interest rate expectations with some speculation that the Fed will not increase rates in September. In part, this speculation will be fuelled by the extensive hurricane damage and rise in oil prices, especially with fears that damage to infrastructure in the hurricane-affected area will disrupt shipping and production while keeping energy prices high for weeks at least. Any Fed hint over a pause in the tightening process would be likely to result in further dollar selling pressure. Over the past three days, interest rate expectations have recorded the biggest move since the 2001 New York attacks with markets now pricing in peak interest rate levels significantly below 4.0%.
From a longer-term perspective the personal spending data will be important as there was a reported negative savings rate of 0.6% for July, the lowest savings rate on record. Overall, it remains very difficult to reconcile a negative savings rate with a strong dollar in the medium term. The US economy will also be exposed to major difficulties if there is a housing-sector downturn as consumers will have to scale back their spending levels, possibly sharply, to restore savings levels. These dynamics could eventually expose the dollar to heavy selling pressure.
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