The dollar was unable to push through resistance close to 1.1710 against the Euro on
Tuesday and weakened back to 1.1780 in New York. The dollar… … was hampered by profit
taking on long positions while there was also a slight narrowing of the dollar's
favourable interest rate spreads. The dollar was little changed in early Europe on
Wednesday.

Overall yield spreads will remain in favour of the US currency in the short term and
this will continue to attract inflows. There will, however, be uncertainties over
the housing sector following a downgrading of earnings and sales estimates by the
luxury house-builder Toll Brothers. There is likely to be greater caution over the
housing sector as a whole, especially with higher mortgage rates. The impact should
still be contained for now, but is likely to pose longer-term risks to the economy
and currency, especially as moderation in the housing sector would lessen the need
for further US interest rate increases. There is also likely to be slightly greater
caution ahead of the Thursday US trade data.

The ECB is looking to take a tough stance on inflation and interest rates in the
short term with at least a 50% chance that the ECB will increase interest rates in
December, and speculation over an increase will offer some Euro support. The impact
will be lessened by any further tensions between the central bank and finance
officials.

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