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Daily market newsletter: 19th June 2006   

Dollar consolidation

Interest rate expectations will offer short-term dollar support with markets looking for further US Fed rate increases over the next two months while bond yields have also moved higher. Euro gains will continue to be restricted by pressure to reduce long speculative positions, but there is likely to be strong institutional demand close to 1.25 against the dollar.  

 

The dollar found support close to 1.2670 against the Euro on Friday and expectations of higher US interest rates helped push the dollar to highs around 1.2565 in Asia on Monday.

 

The US current account deficit narrowed to US$208.7bn in the first quarter of 2006 from US$223.1bn previously, helped by a reduction in unilateral transfers. The investment income account reverted to a small surplus which will support confidence, but a negative figure of US$61.8bn for direct investment is an important medium-term negative factor for the dollar.

 

The Federal Reserve will take a tough stance on inflation, but is likely to look at containing market expectations over future policy to gain greater policy flexibility. Market expectations and increased yield support will still offer short-term dollar support, but the US currency will be vulnerable to a shift in expectations given that markets have priced in over a 70% chance of an August increase as well as a 100% chance of a June increase.

 

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