*Last Updated May 18, 2006, 3:25 am

Daily report by Investica Ltd

Website: http://www.investica.co.uk

Email: tim.clayton@investica.co.uk

FOREX ANALYSIS

Dollar consolidation 18-05-06

The dollar weakened to just beyond 1.29 against the Euro on Wednesday and there was significant volatility after the US inflation data before the dollar strengthened sharply to highs around 1.2700. The dollar consolidated in early Europe on Thursday before weakening to 1.2790.

The headline US consumer price increase for April was slightly higher than expected at 0.6% while the core rate recorded the second successive 0.3% increase which pushed the 12 month rate to 2.3% from 2.1%. The Federal Reserve will, therefore, need to remain on alert over potential inflationary pressure from energy costs being passed through into general price increases and markets moved closer to pricing in a June interest rate increase. Yield considerations will underpin the dollar, but there will be increased fears of a hard landing for the economy.

Comments from European finance officials were again potentially important on Wednesday. The German Economics Ministry warned that strong Euro gains could dampen exports while the French Finance Minister Breton stated that all must be done to stop the Euro moving higher against the dollar. Officials will primarily be concerned over the pace of recent currency moves and the risk of destabilisation, but the remarks also suggest that there will be opposition to near-term Euro moves above the 1.30 level.





Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
Website: http://www.investica.co.uk



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