The dollar was unable to regain ground against the Euro in European trading on
Thursday and weakened sharply in New York, undermined by fundamental and technical
considerations....

... Losses accelerated after a break above 1.21 and pushed the dollar to
a low of 1.2205 before a partial recovery to 1.2160.

The US data offered no support with jobless claims rising to 390,000 in the latest
week from 369,000 the previous week and this increased market unease over the US
payroll report. Hurricane Katrina accounted for around 75,000 of the claims and the
underlying data still looked relatively firm. The September employment report will
be affected by hurricane Katrina and this will limit the usefulness of the report,
although it will still have an important impact on dollar sentiment. The labour
market tends to act with a delay to changing economic conditions and there is the
risk that it will not pick up the early signs of weakening demand in the economy.
The dollar will be sensitive to any evidence of weakening retail spending during the
crucial Autumn selling season.

The markets will also be looking at the inflationary implications of the earnings
data within the payroll report. There will be some relief that crude oil prices have
weakened, but gasoline prices are still high. The Fed will continue to watch
inflation trends carefully and will remain committed to interest rate increases in
the short term. Yield considerations will offer dollar support, but there is likely
to be greater caution over dollar buying with less confidence over US trends and
fears over stagflation. Any sustained increase in risk aversion would also be likely
to undermine the dollar due to the wide current account deficits.

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