Wednesday May 12, 2004 - 09:48:04 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar profit taking likely
Daily Market analysis 12/05/04
Key factors today:
Attention will turn back towards economic indicators with the US trade balance likely to have a significant impact if it is outside a US$41-44bn range. A high deficit would encourage a further dollar correction.
Dollar sentiment will remain firm, but there will be some disappointment that the US currency has again been unable to break resistance around 1.1800 and this will leave the dollar vulnerable to further profit taking, especially if the US trade figures are weak. With tough resistance at 1.18, there is the potential for a Euro move to 1.1920, possibly extending to 1.1980.
The dollar made a further attack on the 1.18 level against the Euro and strengthened briefly to 1.1790, but the dollar was unable to hold these gains and the Euro strengthened back to 1.1870 in early Europe on Wednesday. Selling pressure on high-yield currencies has eased for now, lessening US currency support, although there will still be underlying caution and a reluctance to build and hold long positions in high-yield currencies.
There are still expectations of a US rate increase in June with speculation fuelled by the latest OECD comments which stated that US rates would need to rise and that June would be a reasonable time for an increase. Fed Governor Moskow also stated that spare capacity in the economy had been used up. The dollar will, however, need fresh incentives to make further gains and a measured Fed tightening stance has been factored in to current levels, emphasised by the dollar disappointment after comments from Governor Santomero who stated that a measured stance was realistic.
Corporate bond issuance has declined sharply over the past few weeks due to fears over rising interest rates and this will tend to slow US fund inflows, potentially damaging the US currency.
The OECD also stated that there was scope for a cut in Euro-zone interest rates and this could harm the Euro to some extent, but this will be offset by warnings from the OECD over the risk of a dollar decline if weak Euro demand pushes up the US trade deficit.
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