Wednesday August 15, 2007 - 10:22:40 GMT
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INVESTICA Ltd - www.investica.co.uk
Flight to quality boost dollar
The US currency will gain further safe-haven support in the short term as credit stresses persist. It is particularly significant that emerging-market currencies have started to come under pressure as this will increase the potential flow of funds back into the US dollar.
The Euro remained under pressure during Tuesday with the currency failing to hold above 1.36 against the dollar. The Euro was unable to secure any recovery in US trading and weakened to lows below 1.35 in early Europe on Wednesday, the lowest level since late June. Equity markets have deteriorated again in Asian trading on Wednesday and there is likely to be a further pressure to repay dollar-denominated loans.
The general reduction in risk appetite and emerging-market stresses will also tend to support the US dollar with a further reduction in long Euro positions, especially after reports of sub-prime related losses at Spanish-based Santander Bank. The spreading of tensions to emerging markets is particularly important and will help trigger capital repatriation back to the US
US producer prices rose 0.6% in July with an underlying 0.1% monthly increase which should not have an important impact on interest rate expectations. The consumer inflation data will be watched closely on Wednesday and a low core reading would increase speculation over a Federal Reserve interest rate cut.
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