Friday October 14, 2005 - 09:47:57 GMT
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INVESTICA Ltd - www.investica.co.uk
Yield focus dangerous
The dollar held steady ahead of the US trade data on Thursday and, after a rally, the US currency hit selling pressure in New York. The dollar weakened to 1.2025 from high of 1.1915. After finding support at 1.2050, the dollar was holding close to 1.2020 in early Europe on Friday with a mood of caution prevailing.
The US trade deficit rose 1.8% to US$59.0bn for August, the third highest deficit on record, with the monthly shortfall again inflated by rising oil imports. The overall export performance offered some encouragement and the non-oil deficit has shown signs of stabilisation, but the underlying position is still very dangerous for the US currency. The deficit with China increased to a record US$22.4bn for August and this will tend to increase underlying trade tensions. This factor will tend to be negative for the dollar against the Asian currencies in the medium term with increased US manufacturing-sector pressure for a weaker dollar.
For, now the markets will still want to concentrate on interest rate differentials and the Friday data will, therefore, be very important. The markets have factored in a high headline consumer inflation increase and the dollar will find it difficult to secure further support from the data. Markets have also discounted a series of rate increases which will limit the potential for fresh dollar buying. The sales and confidence figures will also be important as the dollar will start to be more vulnerable if there is evidence that rising interest rates and high energy prices are causing more serious damage to consumer spending levels. There has also been evidence of a more out of high-yield emerging markets over the past 24 hours and this will offer some risks to the dollar if there is a general increase in risk aversion.
The ECB will remain concerned over inflation with chief economist Issing delivering a warning over inflationary pressures on Thursday and these warnings are likely to continue in the short term. The ECB will also be concerned over sustained Euro weakness as this will exacerbate any inflationary pressure. These factors combined will offer the Euro some support.
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