Wednesday December 21, 2005 - 11:00:49 GMT
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INVESTICA Ltd - www.investica.co.uk
Where next for the dollar
The dollar strengthened to highs beyond 1.19 following the US data and Euro losses accelerated after the break of 1.19 with a drop to a low of 1.1840 before a marginal recovery. The Euro edged stronger in early Europe on Wednesday and should find support close to 1.1850.
Trading liquidity started to fade during Tuesday, with the impact heightened by a transport strike in New York, and this helped exaggerate the dollar move. Liquidity will continue to diminish over the next 48 hours ahead of the market holidays, maintaining the risk of choppy conditions as position are adjusted. markets will also attempt to trigger a break of key technical levels, maintaining the risk of sharp moves.
The headline US producer price inflation data was weaker than expected with a 0.7% drop for November, triggered by lower energy prices, while the monthly underlying increase was also below expectations at 0.1%. The November housing data was firm with starts rising 5.2% over the month to an annual rate of 2.12mn. Construction activity may have been boosted by warm weather during the month with the risk of a December reversal, but there will still be short-term optimism over the US economy with expectations of controlled inflation and firm growth.
The German IFO institute revised up its forecasts for GDP growth and there is still the potential for a second increase in Euro interest rates early in 2006 which will offer background Euro support. Comments from ECB officials on Wednesday suggested that there will be at least two rate increases during 2006.
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