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Dollar vulnerable in Asia
There will further suspicion that the US authorities will quietly encourage dollar depreciation to help ease trade concerns and US comments on exchange rates will remain very important. Overall, the Japanese authorities are likely to bank on private dollar demand and importer US currency buying to defend the 105.0 level, but a rapid decline through this level would still be likely to provoke intervention. The most likely outcome is that the US currency will eventually strengthen through the 105.0 level towards 103.5. The dollar was subjected to further selling pressure on Friday, despite firm US data, and the dollar remained weak at 105.2 in early Europe on Monday. The US currency resisted a decline through the 105.0 level and recovered back to 105.45. There will still be initial dollar demand from importers close to the 105.0 level and a near-term defence of option positions. The US currency was undermined in part by the repatriation fears associated with US Treasury coupon payments of US$68bn due on Monday. Most of the funds are likely to be reinvested back into the US which will limit the actual impact, but there will be underlying fears over a lack of US currency demand and the deteriorating debt position. There will be further speculation that the US officials will be happy to allow a weaker US currency in Asia to help curb the US trade deficit. The attitude of Japanese and wider Asian authorities to currency strength will remain very important. There will be protests against yen strength and, although intervention may not be forthcoming until around the 103.5 level, the authorities will encourage increased private dollar demand. While China retains the existing yuan peg, there will be wider Asian determination to prevent current gains as this would jeopardise their own export sectors. Chinese resistance will also increase the potential for Japanese intervention. Conversely, a stronger yuan would open up the potential for wider Asian currency appreciation including significant yen gains. Analysis supplied by