Friday October 7, 2005 - 09:51:30 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar looks for reassurance
The dollar was unable to regain ground against the Euro in European trading on Thursday and weakened sharply in New York, undermined by fundamental and technical considerations. Losses accelerated after a break above 1.21 and pushed the dollar to a low of 1.2205 before a partial recovery to 1.2160.
The US data offered no support with jobless claims rising to 390,000 in the latest week from 369,000 the previous week and this increased market unease over the US payroll report. Hurricane Katrina accounted for around 75,000 of the claims and the underlying data still looked relatively firm. The September employment report will be affected by hurricane Katrina and this will limit the usefulness of the report, although it will still have an important impact on dollar sentiment. The labour market tends to act with a delay to changing economic conditions and there is the risk that it will not pick up the early signs of weakening demand in the economy. The dollar will be sensitive to any evidence of weakening retail spending during the crucial Autumn selling season.
The markets will also be looking at the inflationary implications of the earnings data within the payroll report. There will be some relief that crude oil prices have weakened, but gasoline prices are still high. The Fed will continue to watch inflation trends carefully and will remain committed to interest rate increases in the short term. Yield considerations will offer dollar support, but there is likely to be greater caution over dollar buying with less confidence over US trends and fears over stagflation. Any sustained increase in risk aversion would also be likely to undermine the dollar due to the wide current account deficits.
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