Saturday August 14, 2004 - 10:45:42 GMT
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INVESTICA Ltd - www.investica.co.uk
Another dollar shock
The record US trade deficit will reignite concerns over the US current account and the dependency on overseas capital inflows. Wall Street weakness and high oil prices will be a negative influence on global investors and make it more difficult for the US to attract sufficient inflows. Uncertainties over US growth will also persist in the short term and markets will want reassurance that the Fed's optimism is justified. The Fed will increase interest rates again, but it will be increasingly difficult for the central bank to maintain a balance in the economy, especially if oil prices do not fall. If US growth does falter, there will be intense pressure for rate increases to be stopped. Overall, the US currency should weaken in the medium term.
US data releases
Trade balance -US$55.9bn Jun (-US$46.9bn May)
Retail sales +0.7% Jul (-0.5% Jun)
Producer prices +0.1% Jul (-0.3% Jun)
University of Michigan consumer confidence 94.0 Aug (96.7 Jul)
Jobless claims 333,000 week ending Aug 6 (337,000 prev)
The currency markets have had a lot to contend with over the past week, with little chance of a respite as the market's two main themes remained in focus. The dollar rallied back to just stronger than 1.22, helped by the Fed, but for the second week running, the dollar was seriously damaged by Friday data and it weakened to a low of 1.2375.
As expected, the Federal Reserve increased rates by 0.25% to 1.5% on Tuesday, but the statement issued by the central bank was slightly more optimistic than expected. The Fed expressed confidence that the economy would rebound after the weaker patch seen during June and it also remained committed to a gradual tightening of monetary policy. Market sentiment over a September rate hike has increased back to around 50% after dipping below this level after the employment report.
The markets are still sceptical over the Fedís optimism and will want evidence that the confidence is justified. The retail sales data was mixed and failed to provide direction as the weaker than expected headline growth of 0.7% was offset by an upward revision to June figures. Jobless claims offered some support with a decline to 333,000 from 337,000 the previous week. The markets will, therefore, be looking ahead to forthcoming growth indicators to assess whether the economy is rebounding. There will be increasing fears over the impact of high oil prices.
The dollar received a serious jolt from the June trade figures. The monthly deficit rose sharply to a record US$55.9bn from US$46.9bn the previous month. Exports fell 4.3% over the month while imports rose 3.3%. The figures are prone to volatility, but the deficit was still a nasty shock. The widening deficit will revive fears over the US ability to finance its current account deficit. These fears are likely to be intensified by Wall Street weakness with the main indices all hitting new 2004 lows during the week. If the US is unable to secure strong capital inflows, the dollar will depreciate.
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