The Euro remained on the defensive against the dollar during European trading on
Tuesday and the Euro weakened to below the 1.20 level even though the...

... dollar was
still finding some difficulties in generating momentum. The dollar retained a strong
tone in New York and during Asian trading on Wednesday, strengthening to a peak
close to 1.1950 on Wednesday.

The US Federal Reserve minutes for the September FOMC meeting showed that there were
increased concerns over inflation following hurricane Katrina. There were, however,
some suggestions that the language at future meetings would need to change given
that rates had already increased significantly. This could suggest that the Fed will
start to assess whether policy has been tightened enough, but it will also raise the
possibility of more aggressive action to curb inflation if inflationary pressure
rises in the short term. There will be greater uncertainty over policy trends which
is liable to increase market volatility. Greenspan's comments on the economy will be
watched very closely today if he chooses to comment on monetary policy or highlights
US structural weaknesses. The trade data will be released on Thursday and there are
still substantial risks associated with the US trade position.

For now, expectations of further US rate increases will remain intact and this will
continue to offer US currency support. The US currency will still find it more
difficult to secure additional buying interest given how much favourable news has
been priced in. The number of speculative long dollar positions in the market will
also maintain the risk of a sharp dollar correction. Underlying Euro buying is
liable to increase at current levels as central banks look to diversify reserves and
this will also make it more difficult for the US currency to extend gains.


www.investica.co.uk