Underlying Dollar Weakness

Underlying dollar vulnerability will continue even if near-term trends may be masked by year-end demand and positioning factors.

The Euro probed resistance levels above 1.40 against the dollar on Tuesday, but was unable to sustain the advance and drifted below this level for most of the day as there was some dollar demand on positioning grounds.

The US economic data remained weak with no suggestion at this stage of any recovery in conditions. Existing home sales fell to an annual rate of 4.49mn in November from a revised 4.91mn the previous month while new home sales also continued to weaken. There was also a reported increase in inventories and decline in prices which will curb any hopes of a near-term recovery.

The Richmond Fed manufacturing index also fell sharply again with a reading of -55 in December from -38 previously There is no doubt that there will be a very steep GDP decline for the fourth quarter possibly as much as 5.0%. Liquidity will be at sharply reduced levels and the US data on Wednesday could, therefore, trigger additional volatility, especially with underlying auto-sector fears also sapping confidence.

The Euro consolidated around 1.3960 later in New York as trading volumes declined and was holding below 1.40 in early Europe on Wednesday.

Investica
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