The New York manufacturing index was stronger than expected with an increase to 31.2 in March from 21.0 in February, although there was an easing… … of inflation pressures.

The Fed Beige Book reported
solid growth in most districts and rising employment. Districts, however,
reported a slowdown in the housing sector and also noted an absence of
labour-cost pressures. The benign inflation trend and slowing housing sector
will reinforce speculation that the Federal Reserve may not need to increase
interest rates much further.

The dollar remains very sensitive to
any downgrading of market expectations and drifted weaker after the Fed report
to 1.2070. The dollar was unable to strengthen through 1.2030 in early Europe on
Thursday. In the context of interest rate expectations, the consumer inflation
data will be very important for interest rate expectations and the dollar on
Thursday, especially following comments from Fed Governor Yellen that policy
will be led by near-term data trends.

The latest capital inflows data
recorded a modest increase to US$66.0bn in January from US$53.8bn previously and
there will be some concern that inflows were below the monthly trade deficit
level. There were also net outflows of private funds from the US bond market
which will unsettle the dollar from a longer-term context, but strong equity
inflows were a more positive factor.

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