Tuesday September 6, 2005 - 10:10:32 GMT
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INVESTICA Ltd - www.investica.co.uk
Confidence holds dollar key
The dollar found support at 1.2585 against the Euro and rallied back to highs just beyond 1.2515 before settling close to 1.2540. Trading was generally edgy and volumes were cut sharply later in the day by the US Labour day holiday. The dollar continued to find some relief in Asian trading on Tuesday and the dollar pushed towards resistance at 1.2485 against the Euro with a subsequent move to 1.2445.
There are still serious concerns and uncertainties over US economic trends following hurricane Katrina. The latest developments have, however, offered some slight relief, especially as oil prices have fallen back from levels near US$70 p/b while the energy installations are being restored to production. There will be strong interest in consumer confidence in the short term, especially after the jump in gasoline prices following the storm. Any evidence of faltering consumer confidence would increase pressure for a the Fed to suspend rate increases. The consumer confidence data today and company retail sales reports will, therefore, receive more attention than usual over the week.
Fed comments will remain under very close scrutiny in the short term, especially as the central bank will not want to disrupt markets. The Fed will want to wait for fresh evidence on the economy, but will not want to surprise markets at the September 20 meeting. If the Fed is seriously looking at the possibility of a rate cut, postponing rate increases or determined to maintain the tightening path some policy hints are likely to appear within the next few days. The dollar will be in a position to recover more ground if the Fed effectively signals that rates will be increased in September. Overall, there is likely to be less risk of speculation over a rate cut which will lessen the potential for aggressive dollar selling. At this stage, the odds just favour the Fed maintaining the tightening policy, but there is a 40% chance that rates will be left unchanged.
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