Wednesday October 12, 2005 - 10:10:17 GMT
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INVESTICA Ltd - www.investica.co.uk
Where next for the dollar?
The Euro remained on the defensive against the dollar during European trading on Tuesday and the Euro weakened to below the 1.20 level even though the dollar was still finding some difficulties in generating momentum. The dollar retained a strong tone in New York and during Asian trading on Wednesday, strengthening to a peak close to 1.1950 on Wednesday.
The US Federal Reserve minutes for the September FOMC meeting showed that there were increased concerns over inflation following hurricane Katrina. There were, however, some suggestions that the language at future meetings would need to change given that rates had already increased significantly. This could suggest that the Fed will start to assess whether policy has been tightened enough, but it will also raise the possibility of more aggressive action to curb inflation if inflationary pressure rises in the short term. There will be greater uncertainty over policy trends which is liable to increase market volatility. Greenspan's comments on the economy will be watched very closely today if he chooses to comment on monetary policy or highlights US structural weaknesses. The trade data will be released on Thursday and there are still substantial risks associated with the US trade position.
For now, expectations of further US rate increases will remain intact and this will continue to offer US currency support. The US currency will still find it more difficult to secure additional buying interest given how much favourable news has been priced in. The number of speculative long dollar positions in the market will also maintain the risk of a sharp dollar correction. Underlying Euro buying is liable to increase at current levels as central banks look to diversify reserves and this will also make it more difficult for the US currency to extend gains.
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