Monday September 12, 2005 - 10:01:26 GMT
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INVESTICA Ltd - www.investica.co.uk
US deficits will be in focus
The dollar was unable to strengthen through 1.2375 against the Euro on Friday with rumours of central back Euro support to protect 1.2370. The dollar weakened to 1.2450, but resisted a retreat through this level and strengthened back to 1.2410 in late New York. The Euro was subjected to selling pressure in Asian trading on Monday, particularly against the yen, and this helped the dollar break resistance with a temporary move to 1.2310 against the Euro.
Markets will remain highly sensitive to US interest rate expectations in the short term. The dollar has gained support from generally reassuring comments from the Fed over the past few days and interest rate expectations have moved higher with markets now assigning an 80% probability of a September rate increase. Longer-dated yields have also been important with US yield spreads rising to 1.08% above German bund rates, a five-year high. Although offering initial support, the dollar will, therefore, now be vulnerable again to any suggestions that rates will not be increased or that there will be pause after September.
The US structural deficits will also return to focus this week with data on the trade and current account together with the latest Treasury capital inflows data starting with the US trade data on Tuesday. Underlying confidence in the dollar will be severely tested if there are record US deficits and there is a high risk of this given the increase in energy prices.
The Euro is being weakened slightly by uncertainty ahead of the German election, especially with opinion polls suggesting weakening support for the centre-right coalition. The CDU support has weakened to the lowest level since February which will make it more difficult for the coalition to secure a majority. There should not be a major impact, but the Euro will struggle to gain support if the CDU-led coalition falls short of a majority.
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