Saturday September 18, 2004 - 11:10:39 GMT
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INVESTICA Ltd - www.investica.co.uk
Barriers to near-term Euro gains
The most likely outcome is that the Fed will increase interest rates by 0.25% to 1.75% next week, but the combination of low inflation and uncertainty over growth will give the Fed scope for a pause in interest rate hikes during the fourth quarter. A pause would lessen the potential for a dollar rally and any sign of a slowdown in consumer spending would also unsettle the US currency. There will be little enthusiasm for the Euro and the lack of confidence in growth prospects elsewhere will offer protection to the US currency. The latest capital inflow figures also suggest that dollar confidence should be sustained in the short term and the dollar's risk profile has improved slightly for now despite longer-term vulnerability.
US data releases:
Retail sales -0.3% Aug (+0.8% Jul)
Current account -US$166.8bn Q2 (-US$147.2bn Q1)
Industrial production +0.1% Aug (+0.6% Jul)
Consumer prices +0.1% Aug (+0.1% Jul)
Philadelphia Fed index +13.4 Sep (+28.5 Aug)
Jobless claims 333,000 week ending Sep 10th (317,000 prev)
The Euro was unable to push beyond 1.23 against the US currency and it retreated to a low of 1.2120 after firm US data, but the US currency was also unable to sustain these gains and the dollar settled close to 1.2175 in New York on Friday. The economic data over the week has not been decisive for the currency markets with mixed US growth figures, although it did illustrate the dollarís underlying vulnerability.
The New York manufacturing index strengthened sharply to 28.3 in September from 13.2 the previous month, but the situation was reversed in the Philadelphia Fed report with a decline to 13.4 in September from 28.5 in August. The underlying components were, however, firm and the overall picture remains mixed. Retail sales fell by 0.3% in August after a revised 0.8% increase in July, but there was an underlying 0.2% increase.
Consumer prices rose by 0.1% in August, in line with market expectations, but the underlying rate has been 0.1% for the past three months. The annual rate has declined to 1.7% which will be much more comfortable for the Federal Reserve. These figures do not suggest that there is a pressing need for a monetary tightening to curb inflation. The Fed will decide on interest rates on September 21st and the most likely outcome is that it will decide on a further 0.25% rate increase. There is, however, the potential for a pause during the fourth quarter to assess economic trends.
The US current account deficit widened to a record US$166.8bn for the second quarter with a weaker trade account compounded by a deterioration in the income account of over US$10bn for the quarter. The dependency on shorter-term capital inflows will therefore continue. The latest Treasury figures reported inflows of US$64bn after inflows of US$74b in June, but there was a recovery in equity inflows to near US$10bn. The markets appear slightly more comfortable with US risk and a recovery in equity inflows would underpin the dollar, but the overall position is still precarious.
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