Friday December 9, 2005 - 11:08:46 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces key test
Euro gains accelerated after the break of 1.1785 with gains to a peak near 1.1850 as trading volatility increased in New York. The Euro was unable to hold the gains and weakened back to 1.1775 in early Europe on Friday.
There is the potential for a further closing of long dollar positions in the short term, especially with year-end pressures starting to build, while there will also be caution ahead of the Federal Reserve meeting next Tuesday. The Fed will increase interest rates, but here will be further speculation over a change in the statement. The Fed will consider this aspect very carefully as it will need to adjust the language to reflect the fact that policy is now broadly neutral. Speculation over a change will tend to restrain the dollar in the short term. There is also a suspicion that capital repatriation flows back into the US will remain lower which will increase the dollarís underlying vulnerability
The Euro-zone economic data remained firm with a 1.0% increase in German industrial production for October. Comments from ECB officials were mixed, but overall were tougher than expected with Issing and other officials warning that the bank could increase rates at any time. Officials also repeated the fact that the ECB was not at this stage planning a series of rate increases. Nevertheless, there is clear evidence that several council members considered that a 0.5% increase was justified in December and that they will push for a second 0.25% increase early in 2006.
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