Monday August 9, 2004 - 09:54:08 GMT
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INVESTICA Ltd - www.investica.co.uk
Anxious wait for Fed decision
The dollar is likely to remain on the defensive in the short term with confidence dented by the very weak Friday US payroll report. High oil prices and Wall Street vulnerability will also tend to undermine the US currency in the short term. Caution is required, particularly after the sharp July Euro losses seen in July. From a medium-term view, the Euro will also struggle to push above 1.25. Nevertheless, even with intermittent rallies, the dollar is likely to weaken towards 1.2350 this week.
The currency markets exploded to life after the Friday US employment report. There was a headline 32,000 increase payrolls compared with expectations of a 228,000 increase, while the June and May figures were also revised downwards by a total of 61,000. There was some good news in a lower rate of employment and there may have been some seasonal adjustment problems, but the figure was still very weak and will hurt the dollar. Wall Street losses will tend to undermine the US currency in the short term and will also focus market interest on the Friday trade figures.
The figure will create fresh doubts over the US economic strength and has also forced a revision in interest rate expectations. The markets are still expecting a rate increase tomorrow, but have cut the probability of a September increase to 40%. Treasury bond yields have also fallen to levels which tend to undermine the dollar with a yield gap of only 10 basis points over the Euro. The markets will assess the Fed statement tomorrow closely and the dollar will be subjected to fresh heavy selling pressure if rates are not increased.
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