Monday September 19, 2005 - 10:32:14 GMT
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INVESTICA Ltd - www.investica.co.uk
US dangers still present
The Euro was unable to sustain a move above 1.23 on Friday and weakened back to levels near 1.22 in New York. The Euro suffered further losses in Asian trading on Monday, weakening to 1.2105, after the German election results before rallying to 1.2145.
In the German provisional results, the CDU won 35.2% of the vote and 225 seats compared with 34.3% for the SPD and 222 seats. The markets were not surprised that there was no overall majority, but the result was even closer and more confusing than expected. This will make it even more difficult for CDU leader Merkel to secure a mandate and there is the risk of a prolonged power struggle, potentially leading to fresh elections within the next few months. Any coalition will also be weaker than expected which will lessen the potential for economic reform in Germany. This will unsettle the Euro initially even though the longer-term damage should still be contained.
The US current account deficit fell slightly to US$195.7bn from an upwardly-revised US$198.7bn shortfall in the first quarter according to Friday's data. The services account remained strong which will offer some further support to the overall current account position. The other longer-term components caused further concerns, however, with the income account moving into slight deficit while there was a further deficit in direct investment. This severe basic balance of payments deficit continues to pose serious longer-term dollar risks.
There was a sharper than expected drop in the University of Michigan consumer confidence index which fell to 76.9 in September from 85.0 the previous month and the headline figure was at a 13-year low. The key aspect now is whether confidence improves now the initial shock of hurricane Katrina has passed and energy prices have retreated slightly. There are still grounds for longer-term concerns and the US consumer is not well placed to absorb external shocks. The most likely outcome is that the Fed will increase interest rates again this week to help curb inflationary pressure, but medium-term policy doubts are liable to increase if there is evidence of a sustained downturn in spending.
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