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Written by Jason   
Thursday, 16 March 2006

The U.S. dollar fell across the board as reports revealed weak-than-expected inflation, limiting speculation that the Fed will continue to raise interest rates much further. The dollar dropped 2.2% against the euro and 1.9% against the yen this week - the largest declines in two months. Further dimishing the dollar's strength is a report released March 14 showing a record U.S. current account deficit. This shortfall amounted to $224.9 billion in the fourth quarter alone. Predicting the Fed's tightening cycle has been increasingly important in the foreign exchange market as many see rising interest rates to be the dominant force behind the dollar's strength since early 2005. 

Speculators are betting that the Bank of Japan will begin raising interest rates as soon a August, which would bolster the argument for a strong yen rebound. We currently maintain a neutral stance on the dollar-yen pair despite the strong decline as of late due to dollar weakness. The level of 116.20 remains critical, for a decline below would open a bearish outlook to test Jan. 12's low of 113.40. Technicals for the euro-dollar are increasingly bullish as we expect a major reversal this quarter for the pair. Upside resistance is slated at 1.2235

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