NEWS / Fiscal Policy, Budget

Euro looks for long-term support

During Tuesday, the dollar gained some support from a general move into US treasuries as emerging currencies were subjected to fresh selling pressure. Although longer-term yields have not moved in the dollar??™s favour, the US currency is gaining support from liquidity considerations and a shift in short-term expectations with the trade-weighted index hitting a three-month high. The Euro was close to 1.2540 in early Europe on Wednesday.

US economic optimism also remains higher as markets continue to downgrade the potential for Federal Reserve interest rate cuts. The markets will watch the FOMC minutes closely on Wednesday for evidence on the Fed??™s inflation concerns and whether there was unease that the Fed could be tightening policy too far. Fears that interest rates had been increased too high would tend to weaken the dollar while the US currency will remain firm if inflation concerns dominate. Rate stability remains the most likely short-term outcome and the Fed stance is unlikely to lead to sharp selling pressure on the dollar.

The Euro-zone data was firm with robust increases for French and Italian industrial production while ECB Chairman Trichet retained a tough stance in comments on Tuesday. His pledge to monitor price developments very closely continues to indicate that rates will be increased again in December. Central bank Euro buying is also liable to increase at current levels which will offer important currency support.