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U.S. Dollar: $1.50 Key Level For Euro

Thu, Oct 22 2009, 09:48 GMT
by Richard Lee

Online Forex Trading

Equity markets are rising. Crude oil is on a tear. And the euro has everyone worried. From European central bankers to the regional exporter, even to the U.S. traveler looking at an even more expensive European getaway, people are paying attention when it comes to the Euro. And why not? The currency has skyrocketed higher against the US dollar in recent months, making an impressive 20 percent gain since hitting the 1.2500 support back in February. The scary thing is, the gains may be more to come as the current momentum seems to be bent on some key factors.

Economic Pessimism

Pure fundamental reasoning for the recent downturn has some in the market convinced that further dollar weakness is sure to come. Although the European economy is down in the dumps as well, the masses seem to be focusing on the growing twin deficits currently held by the U.S. The same concerns helped to support a higher Euro valuation just five years ago, when estimates had calculated a fiscal shortfall of $700 billion. Chump change to what experts are now shuddering at when considering the plethora of programs that have been approved by the current administration. Participants of the era will also scarcely remember falling employment as well. All in all, current budget deficits will have to be funded by an increasing number of Treasury debt issuance, adding to an already bloated credit bill that is surely to decrease the confidence in U.S. based debt.

Carry Trade Bandwagon

It used to be the Japanese yen that was the butt of all carry trades in the last two to three years. However, now it seems that the greenback is the funding currency of choice. It makes perfect sense as the Federal Reserve has made significant cuts to the benchmark interest rates over the last 20 months in order to accommodate the underlying credit markets. But at what cost? With benchmark rates at the record low of 0.25 percent, traders will continue to sell the U.S. dollar short, helping out the Euro. Making it even worse is the fact that U.S. rates aren’t expected to be raised until after all of the other G7 central banks have their turn. Although expectations were hovering around a 40 percent chance of a 25 basis point increase by the Fed in the fourth quarter, those estimates have dwindled and placed a higher likelihood of that happening at the tailend of the first half 2010.

Dollar Doldrums: Central Banks Want Out

Additionally, central banks have played their part in rumors and threats as entities in all parts of the world have begun to talk the dollar down. Earlier this summer, BRIC nations complained about their exposure to the dollar with Russia leading the way for a supranational currency or preferential trading of special drawing rights backed by the World Bank. All of this talk of currency conversion has done nothing but increase already nascent speculation that a massive euro conversion may happen as nations attempt to diversify out of U.S. dollar based assets. This is of particular interest as three of the five aforementioned nations have risen up the currency reserve ladder (#1 China, #3 Russia, #5 India), with the fourth (#8 Brazil) not too far behind. As long as there remains the underlying discomfort between the greenback and these nations, there will be a supported preference for anything other than U.S. currency.

The Monkey Wrench

Given the recent facts and trends, Euro strength looks to be here to stay. Even if European Central Bank President Jean Claude Trichet begins his dutiful jawboning of the detrimental effects of a stronger currency, speculators are likely to keep pressing the currency higher. The only caveat seems to be in the form of an earlier economic assessment of the Euro region. Given the fact that interest rates remained relatively high in the area, economic growth may be slow to come. The slower growth will likely keep European nations behind the current recovery and force policy makers to drag heels when it comes to raising rates in the near future. Should this economic stalling actually take place, the current euro momentum may be placed in jeopardy.

Published on  Thu, Oct 22 2009, 09:52 GMT