Fed statement will be crucial - 07-08-07
The Fed will seek to reassure markets that the underlying economy is sound which would provide some dollar relief, but strong dollar gains are unlikely.
Caution will persist ahead of the Tuesday Federal Reserve interest rate decision. There is unlikely to be a change in rates, but the statement will be watched very closely and this meeting is certainly the most important of the year so far.
The dollar will tend to some under renewed selling pressure if the Fed expresses increased concerns over the growth outlook and credit-related difficulties. The impact should be limited to some extent by the fact that markets have already priced in at least one interest rate cut this year. Any evidence of complacency over the credit situation by Chairman Bernanke would also tend to undermine Federal Reserve credibility.
The Fed will, therefore, need to balance the growth and inflation concerns at the same time as offering reassurance over the underlying economy's health. A favourable Wall Street reaction to the Fed statement would help support the dollar in the near term.
Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
+44 (0) 1452 781001
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