Friday September 30, 2005 - 09:50:00 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro banks on support
The Euro was unable to push above the 1.2075 level against the dollar during Thursday and favourable US data pushed the Euro down to near 1.20, but the US currency again hit selling pressure close to this level and settled just weaker than 1.20. The dollar was little changed in early Europe on Friday before making another challenge on 1.20.
The US GDP figures failed to have a significant impact with the final reading meeting market expectations at 3.3%. There was a small increase in the GDP deflator, but it remained within recent ranges. The jobless claims data was lower than expected with a drop to 356,000 in the latest week from 435,000 as the effects of hurricane Katrina started to fade. The underlying labour market remained strong which will help underpin dollar sentiment and trigger an upgrade to next week's payroll estimate. The US currency also gained some support from a firm Dow Jones index performance. Interest rate expectations will remain important and market confidence over further rate increases is continuing to build. The latest comments from the Fed reinforced these expectations with Governor Santomero stating that the Fed's challenge was price stability. As rate increases are priced in, however, the dollar will find it more difficult to secure further buying interest and a rise in inflation expectations would also tend to unsettle the dollar even with expectations of higher nominal interest rates.
There was further evidence of longer-term Euro buying below the 1.20 level and this buying is likely to continue in the short term. Underlying dollar sentiment is, however, strong and the markets will want to buy the currency on any significant near-term retreat. There is also the potential for capital repatriation back to the US which will underpin the currency and the markets will aim to buy the dollar when central banks are not present. A dollar break through 1.20 should certainly not be discounted, although there could be a swift Euro recovery given the extent of dollar optimism.
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