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Derivatives

New Year Outlook Remains Overcast For Dollar, Bright For Euro

The fall of the greenback against the major currencies and a simultaneous rise in commodity prices set a trend coming into the end of the year and analysts expect to see this continuing in 2004.

The fall of the greenback against the major currencies and a simultaneous rise in commodity prices set a trend coming into the end of the year and analysts expect to see this continuing in 2004. The euro's rise from USD1.18 at the end of November to USD1.25 last Tuesday is expected to continue, with forecasters largely agreeing on the euro reaching USD1.30 by year end. One strategist added that short-term trading could see the currency pair move higher than the year-end forecast before the pair settle.

During the last year a lot of traders have executed barrier options and 2004 will see dealers trading spot and options to defend these barriers, noted a trader.

The move into currencies dominated by the commodity markets and commodity markets themselves, which began around the same time as the dollar's fall, is expected to be a theme of 2004. One London-based analyst, however, suggested that commodity currencies will be dependent on gold prices and their strength may not last longer than the first quarter. The Aussie dollar has been proving popular ahead of the new year, particularly in derivatives strategies involving buying U.S. dollar puts versus basket calls.

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