Treasury - Daily Forex for day 26.09.2004

...markets, strengthening domestic economic activity and the prospects of further interest rate tightening after two summer rate hikes. Most recently, a technical correction pushed the Czech unit down from one-month highs against the euro. However, there was muted reaction to the government's approval of next year's budget deficit. The draft targets a gap of 83.6 billion crowns, in line with the country's euro convergence programme and below this year's expected 115 billion.

International markets

The U.S. currency kept a slightly bearish tone versus the euro in the last two weeks. Even though the U.S. trade deficit narrowed more than expected in July, it was still the second highest in history. The gap shrank to $50.15 billion, beating market expectations for a deficit of $51.75 billion. The record was set in June, at $55.02 billion. Contributing to the dollar's weakness, U.S. producer price index fell 0.1% in August, compared with economists' forecasts for a 0.1% rise. The PPI data could suggest muted price pressures, reducing expectations for more aggressive Federal Reserve interest rate hikes. Nevertheless, the Fed lifted interest rates by 25 basis points on Tuesday, in line with market predictions. Despite the hike, the dollar extended its slide against the euro, dropping to a one-month low as the Fed signalled that both inflation and inflation expectations were easing. More benign inflation outlook seemed to overshadow Fed's upbeat assessment of the economic growth and led many to believe that the Fed might pause in its rate-hiking campaign.