The Euro edged slightly stronger against the US currency ahead of the US trade
deficit on...

... Friday, but the Euro was subjected to fresh selling pressure after the
data and weakened to a low near 1.21. The Euro also weakened to a low of 1.2035 in
Europe on Monday.

The US trade deficit widened to US$57.0bn for April from a downwardly revised
US$53.6bn in March. The figure has eased fears over the deficit to some extent as
markets had been expecting a higher deficit close to US$58bn and were fearing a
deficit above US$60bn. The deficit was, however, still the fourth-worst on record
and the deficit still rose by 22% for the first four months of 2005. The market's
reaction was more due to weak Euro sentiment and the price trends following the data
will reinforce the negative Euro sentiment. Euro confidence will remain very weak in
the short term and it will be difficult to secure near-term relief, but some caution
is required as sentiment is becoming extreme.

The dollar will continue to gain support from near-term interest rate expectations.
Market speculation over a Fed pause in tightening has eased following Greenspan's
testimony last week while speculation over a cut in Euro interest rates will
continue. The yield spread on dollars over Euros widened to 90 basis points on
Friday and this will offer near-term dollar support. The US inflation rate on
Tuesday and Wednesday will be important for interest rate expectations and the US
currency.

The latest IMM data recorded a small decline in short Euro positions of around 500
contracts in the latest week, cutting the short position to just below 18,000,
although this was still the second-highest short Euro position since 2002. The
overall long dollar position was also the second-highest since 2000, reinforcing the
fact that the US currency could be vulnerable to a significant correction.

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