The dollar strengthened to 1.2170 against the Euro during Tuesday, but was unable to
sustain the...

... gains and weakened back to 1.2215 in New York with little change in
early Europe on Wednesday.

US consumer confidence was stronger than expected with an increase to 105.6 in
August from 103.6 in July, but the dollar was unable to sustain initial gains
following the report. There will be concerns over the contradictions with the
Michigan report issued on Friday and unease that confidence will be damaged by high
oil prices. There will also be a suspicion that confidence is being inflated by the
impact of high housing prices and that the economy will, therefore, be very
vulnerable if prices start to decline. Hurricane Katrina will also have a damaging
impact on the economy which will unsettle the dollar slightly.

The Fed minutes from the August meeting stated that members wee concerned over a
possible increase in inflationary pressure, which suggests that the Fed will be
looking to maintain interest rate increases and could be forced to consider a more
aggressive stance. Committee members, however, also expressed doubts over future
consumer spending trends. These doubts are liable to increase if oil prices remain
at very high levels following a renewed push to above US$70 p/b on Tuesday. Overall,
the Fed is likely to face an increasingly difficult task during the fourth quarter
due to inflation and growth contradictions. There are likely to be growing pressures
to stop interest rate increases if oil prices do not decline significantly. The
overall implications of these trends are unlikely to offer significant dollar
support and could result in heavy selling pressure if the US economy starts to
deteriorate significantly.

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