The dollar weakened to lows around 1.2285 in New York on Monday before correcting back to 1.2250, but confidence remained fragile and dollar sentiment has… … deteriorated.

Comments from Fed officials will be
watched very closely over the next few days to assess whether there is a
concerted attempt at moderating market expectations over future policy. The Fed
minutes, due for release later on Tuesday, will also be important for hints on
future policy and the dollar will be vulnerable if there were significant splits
on policy at the meeting.

Given the close debate on short-term
policy, the individual releases will remain under close scrutiny given the
potential impact on the Fed. The US growth data on Monday failed to support the
dollar as the New York manufacturing index weakened significantly to 15.8 in
April from 29.0 in March, although the survey is notoriously erratic. Confidence
among US homebuilders continued to deteriorate and the dollar is likely to be
hit hard if there is sharp deterioration in housing
starts.

The inflation data over the next 48
hours will also be important for interest rate expectations and the currency.
The dollar will tend to remain under pressure if the data does not suggest that
the Fed needs to push interest rates above 5.0% while strong data would offer
temporary dollar support. The rise in oil prices will be watched closely and
could overshadow the March inflation data if prices continue to rise. A
combination of higher inflation and slowing economy would cause major problems
for the Fed and would be unlikely to offer dollar support.

www.investica.co.uk