Thursday November 17, 2005 - 11:34:38 GMT
INVESTICA Ltd - www.investica.co.uk
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Dollar vulnerable to correction
The Euro weakened to lows just below 1.1650 after the US data on Wednesday, but crawled back to 1.1690 as Euro selling eased. The US currency was able to secure fresh buying interest on Thursday with a move to 1.1645 before a retreat to 1.1690.
The US data again had a firm bias during Wednesday. Headline consumer prices rose 0.2% for October compared with expectations of a 0.1% increase while the core increase was in line with expectations at 0.2%. The annual core rate increased marginally to 2.1% from 2.0%, the highest rate since May, although this was still relatively benign. The inflation data over the past 36 hours will reinforce market expectations that the Federal Reserve will stay on the course of gradual monetary tightening. Overall dollar sentiment will remain strong, but confidence and fresh buying will have to battle with the amount of favourable dollar news already priced in. The dollar is likely to be restrained slightly by a drop in US Treasury bond yields, especially as the 10-year bond yield has dropped below the 4.5% level, and by further evidence of a slowdown in the crucial housing sector.
The capital inflows data, reported by the Treasury, was stronger than expected with inflows of US$101.9bn for September, the highest figure for 2005. The data reinforces the fact that the US has not had any difficulties financing the current account deficit over the past few months. The breakdown was also generally favourable with strong inflows into US equities and corporate bonds. The challenge will become much tougher once confidence in the US economy deteriorates and yield support ebbs, especially as official buying of US assets has dropped sharply, although this is likely to be a problem for next year.
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