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Investica: Daily market analysis 09-01-06 - Dollar confidence slumps. |
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Monday, January 09, 2006 |
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Dollar confidence will be badly damaged by the sharp loses seen over the past week and there will be a greater reluctance to sell the yen on yield grounds even though interest rates will remain close to zero. There is also little prospect of short-term intervention to weaken the yen. From a longer-term perspective, there is the potential for stronger Asian currencies, especially if the Chinese yuan is allowed to gain ground. There is, however, the probability of a near-term correction weaker following recent sharp yen gains. The dollar weakened sharply after the US payroll report, dropping to lows below 114.50. The dollar weakened to lows of 113.75 in Asia on Monday despite a Japanese holiday before recovering back to 114.20. The Japanese Finance Ministry has not indicated major concern over the yen's level so far with Finance Minister Tanigaki stating that moves had been volatile, but within longer-term fundamentals. Unease over warnings will tend to deter aggressive dollar selling, but there is no suggestion at this stage of near-term intervention. The Chinese monetary authorities have indicated longer-term plans to diversify foreign exchange reserves away from the US currency. This remains a potentially important source of strength for Asian currencies and US dollar weakness, especially in the medium term. Asian currencies are likely to retain near-term underlying strength which will underpin the yen. Gains will, however, be curbed by potential central bank intervention and regional opposition to rapid currency gains.
January 2006
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