Saturday August 21, 2004 - 10:27:50 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex - Oil prices unsettle markets
Although US indicators are still relatively firm, there will be increased fears that high oil prices will damage the consumer and business spending outlook. In this environment, the Fed will be more reluctant to increase interest rates and this will tend to undermine the US currency. The latest capital flows data offered some relief, but private inflows are likely to be fragile. This will maintain the dollar's dependency on central bank inflows from Asia and flows should be strong enough to avert rapid dollar losses. Greater confidence over global growth would also hurt the Euro and the number of long speculative positions will also make it difficult for the Euro to advance. Nevertheless, despite intermittent rallies, the overall dollar trend is liable to be for depreciation.
US data releases
Consumer prices -0.1% Jul (+0.1% Jun)
Philadelphia Fed index +28.5 Aug (+36.1 Jul)
Jobless claims 331,000 week ending Aug 13 (334,000 prev)
The Euro/dollar market has found it difficult to find direction over the past week and this has encouraged a greater interest in other currencies, especially those with high yields. The Euro was not able to push above the 1.2385 level and it weakened back to 1.2320 in New York on Friday.
The US economic data was generally not supportive of the US currency, although it was far from disastrous. The New York manufacturing index fell sharply in August and the Philadelphia index dipped to 28.5 in August from 36.1 the previous month. There was also a decline in the orders and employment components while the prices index remained high. Industrial production rose by a subdued 0.4% in July. The August evidence is still tentative, but there will be concerns that the US economy will not be able to regain momentum. In this context, oil prices will remain under close scrutiny after a further increase this week. Prices have pushed to near US$50 p/b and there will be fears that the US economy will be damaged by prices at this level. September data will be crucial for the economy and currency.
Consumer prices fell 0.1% in July and there was also a moderate 0.1% rise in underlying prices. The dip was, however, generated by a dip in gasoline prices. Since then, oil prices have risen strongly again and the headline figure will be under upward pressure in the next monthly figure. The Fed will face a very difficult task in September if the economy is showing signs of weakening at the same time as inflation is rising. This combination would seriously damage the dollar.
The latest US capital inflows data offered relief with inflows rising to US$71.8bn in June from US$65.2b in May and there was a slight positive figure for equity inflows after three monthly declines. Wall Street has also managed to stage a recovery this week, but it will be difficult to secure a strong rebound and underlying dollar vulnerability will persist.
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