Saturday September 11, 2004 - 11:02:56 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: Trade fears will continue
The dollar's reaction to Greenspan's testimony indicates the difficulties in pushing the currency through the 1.20 level and there is likely to be further medium-term resistance around this level. There are likely to be further uncertainties over US growth trends, especially with some signs of vulnerability in consumer spending. US interest rates are likely to increase in September, but there is an increasing risk that rates will then be left be on hold. Any pause in rate hikes will tend to undermine the US currency, especially as markets had priced in short-term rates of at least 2.0% by the end of 2004. The dollar's dependence on short-term inflows will ensure medium-term vulnerability.
US data releases
Trade account -US$50.15bn Jul (-US$55.02bn Jun).
Producer prices -0.1% Aug (+0.1% Jul)
Jobless claims 319,000 week ending Sep 3rd (363,000 prev)
The dollar strengthened to near 1.20 ahead of Fed Chairman Greenspanís congressional testimony on Wednesday, but the dollar failed to maintain this strength and weakened significantly over the second half of the week to a low near 1.23 on Friday in New York.
Greenspan was generally optimistic over the economy, stating that it was regaining traction after the soft spot in June. He also expressed confidence that spending and the housing sector rebounded in July. Greenspan did, however, express uncertainty over recent retail sales data and he was also surprisingly cautious in his overall assessment of economic conditions. In particular, he expressed uncertainty over the impact of oil prices and his comments failed to meet the marketís expectations. The lack of certainty also led to market fears that the economy may not be performing as well as expected. The Fed Beige Book was also slightly weaker than expected with several districts reporting that activity had slowed.
Fed Chairman Greenspan was generally optimistic that inflation would remain under control and producer prices also recorded a surprise 0.1% decline for August. The comments from Greenspan suggest that an interest rate increase remains likely at the September 21 Fed meeting. There will, however, be speculation that the Fed will then be able to hold rates steady, especially if there is evidence that the economy is faltering. The fourth quarter will be an important period.
The US trade deficit fell to US$50.15bn in July from the record US$55.02bn deficit in June, but it was still the second highest on record. The trade account will remain a serious medium-term dollar burden and the current account figures will be in focus. The dollar vulnerability created by the trade deficit was illustrated by the comments from Fed Governor Yellen who stated that a turnaround in trade would involve the currency. In other words, the US dollar is likely to weaken in the medium term.
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