Tuesday November 15, 2005 - 11:07:27 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar driven by yields
The Euro was unable to push above the 1.1780 level on Monday and retreated back to a low of 1.1660 before a recovery back to 1.1690 in late New York. The dollar was little changed in early Europe on Tuesday before renewed gains to 1.1670.
The US dollar will aim to secure further benefit from yield considerations in the short term. The comments from Bernanke will be closely watched on Tuesday as the Fed Chairman nominee faces a Senate confirmation hearing. Bernanke is likely to reinforce his inflation fighting credentials in the hearing and this should offer some dollar support, although markets will be on alert for unexpected comments and the dollar will be vulnerable if he suggests doubt over a further series of rate increases. The housing market will continue to be watched carefully in the short term, especially with evidence that rising yields are cooling the market. Any further evidence of a significant slowdown would start to curb interest rate expectations and unsettle the dollar. The retail sales and producer price inflation data will also be watched closely on Tuesday for evidence of spending and inflation trends.
There is evidence that the large US companies are aiming to complete their capital repatriation under the Homeland Investment Act before the Thanksgiving Holiday. There will, therefore, be the potential for further dollar supportive flows in the short term, but the dollar is also likely to receive considerably less support in December as the repatriation flows could fall sharply.
ECB officials have generally taking a tough stance on inflation over the past 24 hours. There have been calls for restraint from finance officials, but the ECB will be in danger of losing credibility if it does not increase interest rates at the beginning of December. The bank appears to be preparing for a December tightening and expectations of an increase will offer some near-term Euro support.
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