Wednesday August 25, 2004 - 09:52:33 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar faces durable goods test
The markets will want to test the 1.20 level which will tend to attract speculative dollar buying. The Euro is, however, now at levels which will attract longer-term buyers and this will make it much more difficult for the US currency to make further progress. Volatility will remain a threat, especially as the durable figures are erratic and the reaction to US data will be an important indicator of underlying dollar strength. Overall, the dollar offers little value stronger than 1.2070.
Oil prices have continued to retreat back towards the 45 p/b level and this has eased immediate fears over global growth. This has reduced the appeal of defensive currencies such as the Euro and encouraged a further reduction in speculative long Euro positions. There has also been a reduction in carry trades with high-yield currencies having less immediate interest due to revived expectations of a Fed interest rate increase in September.
The optimistic comments from Fed officials have also helped underpin dollar sentiment. There will be interest in the durable goods data today and GDP revisions on Friday. Markets are expecting an increase of around 1.0% in durable goods. A figure below 0.5% would stem near-term dollar interest, but caution is required as the durable goods data is very erratic.
From a longer-term perspective, longer-term Euro buying is likely to increase when the currency is weaker than 1.21. This will make it more difficult for the dollar to make further progress as it will need good buying interest rather than just a covering of short dollar positions. The true test for the US currency and US markets in general will come in September.
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