Friday June 25, 2004 - 09:33:00 GMT
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INVESTICA Ltd - www.investica.co.uk
Fading expectations hurt dollar
The dollar will be damaged by disappointing economic data and security concerns. Expectations of an aggressive Fed tightening next week will also continue to fade. The Euro will still find it difficult to make strong progress, especially after the disappointing data. The risks are biased towards a further test of dollar support at 1.2185, although a breakout will be difficult ahead of the weekend. From a medium-term view, the Euro offers good value at levels close to 1.20.
The dollar was put back on the defensive on Thursday, but the Euro was again unable to sustain the advantage. The Euro briefly pushed above 1.2185 before sinking back to 1.2115 in Europe on Friday. There will be a reluctance to maintain aggressive positions on Friday ahead of the weekend which could support the dollar slightly.
The US data was disappointing with durable goods orders declining by a surprise 1.6% in May after a 2.6% April decline. Jobless claims also rose to 349,000 in the latest week from 336,000 previously. The markets are liable to scale back rate expectations slightly which will discourage dollar buying. The risks still suggest that the Fed will decide on a 0.25% rate increase next week.
Security concerns are likely to be a significant factor next week ahead of the transfer of power to local authorities in Iraq on Wednesday. The net risks will remain dollar negative.
The German IFO index was disappointing with a decline to 94.6 in June from 96.0 the previous month. From a longer-term perspective, there is evidence of further Russian buying of Euros to rebalance reserves and this will tend to support the Euro.
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