Wednesday February 15, 2006 - 11:27:54 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar prices in rate increases
Strong US data pushed the Euro down to 1.1860 on Tuesday before a recovery back to 1.1915 in late New York as the dollar was unable to hold gains. The dollar was holding little changed in early Europe on Wednesday with caution ahead of the important US Wednesday events.
The US retail sales report was much stronger than expected with a 2.3% headline increase for January after a downwardly revised 0.4% rise for December. The report will boost near-term confidence over the economy and support interest rate expectations, although the data is likely to have been distorted by warm January weather. In this context, the growth data for January as a whole is likely to support the economy. There will, however, be the risk of a string of poor figures for February which will be reported during March as January weather-related distortions are reversed. Strong growth figures will also cause some unease over the US trade deficit.
With the next Fed meeting late in March, the data during that month would still have a significant impact in shaping Fed considerations and persistent weakness would be significant. In the shorter term, attention will focus on Bernanke‚Äôs congressional testimony on Wednesday and futures markets are giving close to a 80% chance of 5.0% interest rates by May. The dollar will, therefore, find it very difficult to secure further buying interest on yield grounds alone.
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