Wednesday August 11, 2004 - 09:43:46 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar will need growth evidence
The Fed's optimistic tone will help support the dollar in the short term and there will be a recovery in expectations over a rate hike in September. Uncertainty will, however, continue and the dollar will be vulnerable if forthcoming data does not signal a rebound. High oil prices and any fresh decline in equity prices would also unsettle the dollar. A further small dollar rally is realistic, but long positions offer little value beyond 1.2200.
The Euro strengthened to a high of 1.2315 against the US dollar, but weakened after the Fed decision with a low of 1.2230 in late New York and the dollar was little changed in early Europe on Wednesday. The dollar also gained some support from a rally on Wall Street, although there will be doubts whether the rally is sustainable.
As expected, the Federal Reserve raised interest rates by 0.25% to 1.5%. The Fed statement was slightly stronger than expected with the Fed expressing confidence that growth would pick up again after the recent soft spot. The Fed also remained committed to removing the policy accommodation at a measured pace.
The Fed comments suggested that September rate hike was still likely at this stage and this has forced a slight reassessment by the markets as there was a tendency to be over-pessimistic. There will, however, still be caution over the growth outlook and the dollar will very be vulnerable if the forthcoming data does not back up the Fed's optimism. The first test will be the retail sales report on Thursday. Strong dollar buying is unlikely.
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