Wednesday December 28, 2005 - 14:20:23 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar yield support weakens
The dollar was little changed against the Euro on Tuesday in market volumes sharply below normal as there was no trading in London. The dollar edged marginally stronger, but was unable to break any major technical levels and was close to 1.1830 against the Euro in New York. The Euro pushed significantly stronger in early Europe on Wednesday and pushed above the 1.19 level.
Yield considerations will remain important in the short term, especially as the US yield curve briefly inverted during Tuesday with the 10-year bond yield lower than the 2-year yield. The effect of inverted yield curves on the dollar has been mixed in previous economic cycles, but the overall implications are likely to be dollar negative in the short term as it will fuel speculation over an end to Fed tightening and a slowing US economy. It is also the case that the US yield spreads over German bunds narrowed and this unsettled the US currency slightly. Interest rate considerations will remain extremely important in the first few weeks of 2006 and will set the tone for dollar trading with the US currency vulnerable if the US-German yield spread drops significantly below the 100 basis point level. the gap had closed to 103 basis points in early Europe on Wednesday.
Confidence in the Euro-zone economy should remain firmer in the short term, especially with evidence of a recovery in German retail sales, and there will expectations of an ECB interest rate increase early in 2006 with ECB members indicating a tough stance on rates. The ECB expectations will offer near-term Euro support.
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