Saturday August 28, 2004 - 08:47:47 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: September crucial for dollar
US economic conditions are likely to become clearer over the next 2-3 weeks. This should also provide greater market direction, especially as liquidity will increase after the summer. Growth trends will be important and the US currency will attempt to rally further if the data is strong. A series of weak reports would, however be damaging, especially as it would lessen the chances of a Fed monetary tightening. Overall, the Fed is still likely to tighten again in September, but it may then pause to assess economic trends. The dollar will remain vulnerable to longer-term structural weaknesses and a fresh rise in oil prices would also tend to be negative for the currency. Overall, the dollar is likely to remain firm initially, but it will be very difficult to gain significantly further as most of the potential good news is in the price.
US data releases
Durable goods orders +1.7% Jul (+1.1% Jun)
GDP +2.8% Q2 revised (+3.0% previous estimate)
University of Michigan consumer confidence 95.9 Aug (96.7 Jul)
Jobless claims 343,000 week ending Aug 20 (333,000 prev)
The Euro has been on the defensive for much of the week and weakened to a low of 1.2010 on Friday. A sustained reduction in prices would be likely to lessen demand for the Euro. The German IFO index was marginally stronger than expected with a decline to 95.3 in August from 95.6 the previous month. The ECB is likely to keep rates on hold in the short term, although there is a small chance of a rate increase during the fourth quarter.
The Euro has been weakened by two significant factors. Firstly, the Euro’s inability to strengthen above 1.2380 encouraged a further reduction in long Euro positions. The Euro was also undermined by the sharp decline in oil prices. After rising to near US$49 p/b, oil prices dipped sharply to a low near US$43, helped by speculation that reserves would be released from the strategic petroleum reserve. Lower oil prices reduced demand for safe currencies with a recovery in global growth confidence. The US currency will, however, now need to secure underlying buying interest rather than relying on short covering.
The US data releases have not offered clear direction. Headline durable goods orders rose 1.7% for July, but the increase excluding transport was limited to 0.1%. There was a drop in home sales and jobless claims rose, although this was influenced by the hurricane. The revised GDP growth figures for the second quarter were in line with market expectations with a reduction to 2.8% from the 3.0% estimated previously as an increase in business investment was offset by a sharp decline in exports. The University of Michigan consumer confidence report dipped to 95.9 in August from a preliminary 96.7.
Fed officials remained generally confident over the economic outlook in comments over the week and the impression given is that they will want to increase interest rates again in September. The September data will be very important for the currency markets. The data will give clearer evidence of underlying trends. In particular, the employment report will be very important in setting dollar direction. Disappointing growth data would undermine confidence in the economy, jeopardise Fed credibility and weaken the US currency. Conversely, a strong report would sustain interest in the dollar.
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