Dollar needs positive data flow - 01-05-07

Evidence of a recovery in growth will be required to revive international confidence in the economy and currency. In this context, the ISM index today will be a very important indicator and the dollar will be vulnerable to short-term selling if the index is below 50.0.

The Euro again found support below the 1.36 level against the dollar on Monday and strengthened to highs around 1.3670 in US trade as dollar sentiment remained weak. The dollar remained fragile at 1.3650 in early Europe on Tuesday before a slight recovery with activity curbed by market holidays in much of Europe.

Within the US, the Chicago PMI index weakened back to 52.9 in April from 61.7 the previous month. The underlying components were generally firmer in the survey, but the strong March figure looks to have been a fluke. The national ISM index will be watched very carefully on Tuesday for further manufacturing-sector evidence. A figure near or below the 50.0 level would reinforce fears over a slowdown in the economy while a figure above the 54.0 level would provide relief. There was a 0.1% construction spending increase for March after a strong revised 1.5% increase the previous month

The personal spending PCE inflation index was unchanged in March with the annual increase falling to 2.1% from 2.4%. The lower core inflation reading will increase confidence that the Fed will be in a stronger position to cut interest rates from late in the second quarter if growth fails to improve. The Fed, however, will still want a series of more positive inflation data before considering a cut in interest rates as it does not want inflation expectations to rise any further.

Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
+44 (0) 1452 781001