Monday October 17, 2005 - 09:47:35 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar vulnerable if growth falters
The dollar challenged the 1.20 level again during Friday, but was unable to hold gains and weakened in New York to lows of 1.2095. The dollar recovered from lows of 1.2120 on Monday to challenge 1.2050 and nervous range trading could dominate in the short term.
The US data was mixed on Friday, but had a weaker than expected bias. The headline monthly consumer inflation rate was higher than expected at 1.2% for September and this pushed the annual rate to a 15-year high of 4.6%. The monthly increase in core inflation however, was held to 0.1% with the annual rate dropping to 2.0% from 2.2%. The Fed will be concerned that the rise in energy prices will eventually be passed on and will start to show up within the core rate over the next few months. The Fed will, therefore, still be on high alert over inflation and will be looking to raise interest rates. The lower core figure will, however, tend to reduce interest rate expectations slightly and this will tend to discourage aggressive dollar buying given that markets have discounted rising rates.
The headline US retail sales increase was lower than expected at 0.2% for September and the underlying increase of 1.1% was inflated by higher gasoline sales as prices rose sharply. Industrial production fell a sharper than expected 1.3% for September due to hurricane Katrina and there will be unease that the University of Michigan consumer confidence fell again in early October. The index dipped to 75.4 in October from 76.9 the previous month, increasing the risk that consumer spending levels will slow. The dollar will be vulnerable if the regional manufacturing data is disappointing this week, although a substantial impact appears unlikely.
The latest IMM data recorded an increase in speculative Euro positions in the latest week to close to 5,000 contracts. This evidence suggests that there is not the great potential for a short-covering Euro rally against the dollar and this will limit near-term Euro gains.
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