Thursday October 27, 2005 - 10:16:18 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar fortunes turning?
The Euro drifted back to near 1.2050 during Wednesday. The Euro, however, found support here and pushed back above 1.21 in Asian trading on Thursday, maintaining a firm tone in early Europe with a move to near 1.2150. The dollar was undermined slightly by reports that General Motors would be investigated for alleged accounting irregularities.
The dollar continued to secure some support from yield considerations with US 10-year yields rising to a 7-month high 4.60% in New York. Rising yields will offer dollar support provided that confidence in the economy can be sustained. In this context, comments surrounding Bernanke's Fed nomination will remain an important focus as confidence in the Fed's inflation credentials will be vital in securing wider economic confidence. The markets have priced in at least another two Fed interest rate increases and the dollar will be vulnerable if growth doubts increase. The durable goods data and GDP reports will, therefore, be important over the next 36 hours, although more forward-looking indicators will probably be more important over the next 2-3 weeks. The Fed has a very narrow path to tread as over-aggressive tightening would raise serious concerns over the growth outlook and this would be damaging for the currency.
The US grand jury investigation will be a significant focus and will be important if senior administration officials are indicted. In particular, charges against Vice President Cheney would be likely to weaken the dollar, possibly sharply, as it would be damaging for Bush. The tough rhetoric from Iran will also tend to erode the US dollar slightly.
The ECB will continue to take a tough stance on inflation and this will offer Euro support. There has been evidence of strong interest in Euro-zone bonds from Japanese investors which will underpin the Euro. Rate expectations have, however, already shifted to some extent and this will limit the potential for further aggressive short-term Euro buying.
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