Monday August 16, 2004 - 09:41:50 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces capital test
The record US trade deficit will continue to unsettle the US currency in the short term. There will also be concerns over the impact of high oil prices and Wall Street vulnerability. The dollar is likely face further selling pressure if capital account inflows today are below US$50.0bn. The Euro is still likely to face tough resistance above the 1.2450 level with major caution after the Euro's big failure at this level in July.
The dollar was seriously damaged by the trade report on Friday with a decline to a low of 1.2375. After weakening to a low of 1.2390 in Asia on Monday, the dollar rallied slightly to 1.2345.
The US trade deficit increased sharply to a record US$55.8bn in June from US$46.9bn in May. There was a modest increase in imports while exports fell by 4.3%. The deficit figures will intensify underlying market concerns over US trade and current account imbalances which increase the dependency on short-term capital inflows. If the US fails to attract sufficient capital, the US currency will need to decline.
In this context, the capital account figures will be even more important for the US currency and the latest US Treasury figures are due to be released later today. Net inflows were US$56bn last month and a figure below US$50bn would be damaging for the dollar this time.
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