Monday September 13, 2004 - 09:50:30 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: Barriers to strong Euro gains
The dollar's underlying vulnerability will continue due to the current account deficit. There will be further speculation over a pause in rate increases after September. This will leave the dollar vulnerable to some further selling pressure. The Euro will still be hampered by the number of existing long speculative positions, and concerns over Euro-zone growth. In these circumstances, the Euro is likely to be blocked around 1.2350.
The dollar weakened to near 1.23 in New York trade on Friday, but the Euro was unable to push through this level and weakened back to 1.2255 in early Europe on Monday.
The US trade deficit was slightly lower than expected with the deficit declining to US$50.15bn in July from US$55.10bn the previous month. There was a modest recovery in exports and oil imports declined. The July deficit was still the second highest on record and will remain a medium-term dollar burden.
The producer price data received more attention than might have been expected after a surprise 0.1% decline in prices for July. This will increase speculation that inflation is under control and that the Fed will decide on a pause in interest rate increase after the September FOMC meeting. CPI figures on Thursday will be important.
The latest IMM positioning figures reported a decline in long Euro positions of close to 3,000 in the latest week, but there was still a net long position of around 18,000 contracts and this will remain a barrier to strong near-term Euro gains.
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