Structural considerations will be important over the next 24 hours at least with the US trade deficit release having an important impact as a higher than expected deficit would undermine dollar confidence. The dollar will look for protection from yield expectations, but rising energy costs will undermine confidence in US growth trends and undermine Fed expectations. The net risks remain dollar negative even if a low deficit offers initial relief.
The Euro found support below the 1.21 level against the dollar during Tuesday and secured a slightly firmer tone, but encountered resistance close to 1.2150 as trading remained cautious. The US currency was undermined slightly by a drop on Wall Street and sentiment appears fragile. The dollar continued to drift lower in Asia and was close to 1.2155 in early Europe on Wednesday.
There were no major US developments during Tuesday with Fed comments not adding much to the interest rate debate, although Fed Governor Stern stated that a firm labour market did not necessarily mean higher inflation. Markets, in general, were looking ahead to the Wednesday trade report. Oil prices increased to near the US$70 p/b level and there were reports that Iran was now producing enriched uranium as part of the nuclear programme. This combination is likely to be negative for the dollar as high oil prices will have an impact on the US trade deficit while Middle East tensions will tend to undermine the ability to fund the deficit.
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