The dollar weakened to a low of 1.2250 against the Euro, but found good support… … here
and the US currency recovered back to 1.2175 in late New York. The US currency
drifted weaker again on Tuesday and the Euro pushed back above the 1.22 level in
early Europe. There is the risk of a further closing of long dollar positions and a
break of 1.2250 support would be potentially very negative for the dollar,
especially with low liquidity.

The US data was again stronger than expected with the ISM index for the
manufacturing sector rising to 56.6 in July from 53.8 in June, but the price index
fell to below the 50.0 level. This has maintained the recent pattern of strong US
data and subdued inflation. The US Federal Reserve will continue to tighten policy
in the short term, but the low inflation indicators are significant. The Fed will
have greater flexibility to suspend the tightening process if there is any sign of a
slowdown in the economy. It is also less likely that the Fed will have to push
interest rates above the 4.0% level and markets have already discounted a move to
4.0%. The US currency will, therefore, struggle to secure substantial benefit from
strong growth alone.

High oil prices will also tend to weaken the US currency slightly, especially as it
will increase market concerns over the US trade deficit and could undermine consumer
spending. Concerns over the US structural position are also starting to increase
again.

The Russian central bank announced that it would increase the proportion of reserves
held in Euros to 35% from 30% previously and this will fuel rumours that the Russian
central bank has been buying Euros over the past week. Structural Euro buying will
remain an important focus in the markets and will continue to offer powerful
background currency support.

www.investica.co.uk