Friday November 11, 2005 - 11:07:20 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar still in charge
The Euro was unable to take advantage of the US trade deficit, failing to push above the 1.18 level, and the Euro weakened sharply in New York trading. A break below support at 1.1710 pushed the Euro down to lows of 1.1665 before a rally back to around 1.17 in early Europe on Friday. The dollar remained generally firm, although the gains were concentrated against the low-yield European currencies.
The US trade deficit widened sharply to a record US$66.1bn in September from an upwardly revised US$59.3bn in August. There was a big increase in import value as energy prices rose sharply while the export performance was disappointing, not helped by a drop in aircraft exports due to a strike at Boeing. The factors that helped push the deficit to a record high have also reversed over the past few weeks, with a drop in oil prices, and this will make it easier to ignore the record deficit, especially as there was a slight drop in the monthly underlying deficit. The trade deficit will remain a serious medium-term hurdle for the dollar, but the reaction illustrates that the markets still want to buy the dollar in the short term unless there is compelling evidence of a shortage of capital inflows.
The capital repatriation flows will remain important in the short term with further expectations that US companies will accelerate dollar buying ahead of the year-end deadline for tax breaks. It remains very difficult to assess the level of these flows, but there will be a short-term positive impact on the dollar. These flows are likely to be offset by an increase in central bank diversification away from the US currency.
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