Thursday September 22, 2005 - 10:05:23 GMT
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INVESTICA Ltd - www.investica.co.uk
US confidence test
The dollar dipped to a low of 1.2265 against the Euro in Asian trading on Thursday before recovering back to 1.2210 in Europe.
There have been increasing fears over hurricane Rita during the past 24 hours and these fears are liable to increase further in the short term, especially as the storm was upgraded to a category 5 hurricane in New York. This is the highest category on the scale and the storm is currently one of the most powerful ever recorded. On its present track, there is the risk of damage to important oil installations in the Gulf of Mexico, together with refining capacity in Texas, and refineries have been shut in anticipation of the storm. There will be fears over further damage to the regional economy, although the flooding risk should be less severe, and markets will also monitor national implications.
Anther surge in energy prices would further damage consumer confidence and risk more sustained damage to the economy, especially if business confidence also weakens. A sustained downturn in confidence and spending would make it much more difficult for the Fed to continue its tightening policy and increase the risk that markets will tend to focus on the dissenting voice at the September Fed meeting. In the short term, the Fed will want to ensure that inflation does not rise further and will be looking to increase interest rates again. Yield considerations will, therefore, offer some dollar support, but the dollar is unlikely to benefit if there is a combination of rising inflation and weakening growth. In this environment, US asset prices would be liable to weaken and this would pose a severe test of market confidence in the US currency as well.
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