The Euro was unable to make any significant headway against the US currency and
weakened to...

... below 1.22 after Greenspan's comments before recovering back to 1.2225
in late New York. The dollar held a firm tone in early Europe on Friday at just
weaker than 1.22 against the Euro.

Fed Chairman Greenspan stated that the US economy was on a firm footing in his
congressional testimony on Thursday. He also stated that he expected interest rates
to continue to rise at a measured pace. These comments will dampen immediate
speculation over a pause in the Fed tightening process, which had started to gain
ground over the past week, and this shift in expectations will offer some dollar
support. Markets will be looking for US rates to increase to at least 3.5%, although
the forthcoming data will also need to be watched closely as speculation over a
pause in tightening will increase again if there is any deterioration in growth
indicators. Confidence in the US economy should remain relatively firm, although
there will still be longer-term concerns over such issues as the housing sector
after Greenspan warned over local housing bubbles and speculative price increases.
These longer-term factors should certainly not be ignored, but the immediate impact
should be limited.

The US trade deficit report will be important for the markets on Friday, especially
as the deficit fell sharply last month. A lower than expected deficit today would
boost optimism over a sustained improvement in the deficit while a sharp monthly
increase would revive market concerns over a rising shortfall. In particular, a
deficit back above US$60bn would provide an important test of the market's dollar
confidence.

The Euro is still not in a good position to benefit from any dollar vulnerability
given the lack of confidence in political and economic developments. The German
consumer inflation data recorded a drop in the annual rate to 1.4% and this will
maintain speculation that the ECB has scope to cut interest rates. The French
industrial production data was also slightly weaker than expected.


www.investica.co.uk