There have been many traders who have bought the euro against the dollar but we think there optimism is misplaced and the euro will move lower and we haven't changed our view and see further weakness for the following reasons...
The expansion of the US quantitative easing program and the start of the expansion of the money supply in March saw investors start to sell what had been seen as a "safe haven" currency 0 but the dollar is in not going to collapse just yet for the following reasons.
The world is still in a recession and there will, be a few more months of bad economic reports to see safe haven flows move into the dollar. The recent strength in stock markets looks like short covering and the big trend is down. Investors have made a lot out of the Fed printing money - but so to are all other major economies so this is not a factor in the short term.
A cheaper US$ is inevitable to restore the global imbalances reflected in America's huge current account deficit but this will not become a factor until we see an improvement in the global economy and were not there just yet. While the one way traffic of dollar buying maybe over, the dollar will remain firm in the short term.
We expect other currencies to vary in their fortunes against the dollar; we see further room for euro weakness and think it looks overvalued for the following reasons.
Euro Interest Rates took it up now there Taking it Down
We have been euro bears for months and we are being rewarded for our view long ago when it was up at 1.60, we said it would probably target 1.20 and it is and the reason for this was, the whole rally of the euro from the par level, was simply based upon interest perceptions that the ECB would hold or raise rates.
While the ECB continues to talk tough on interest rates, citing concerns of a liquidity trap whereby rates are so low that growth will be unresponsive to additional easing but this is not the real problem the real problem relates to the Euros value in international purchasing terms. The ECB is the odd central bank out in its stance on interest rates as it continues to resist aggressive cutting. the more it continues to hold off the inevitable the more the euro zone economy gets hurt and its getting hurt right now.
Europe is deep in recession and the outlook is not pretty -first quarter GDP decline set to far bigger than the sizable Q4 economic contraction. The latest industrial production data points to a faster deterioration than in the UK and weak consumer confidence is reflected in declining retail sales.
The strong euro threatens to make is widening the current account deficit. The fiscal stimulus package looks weak compared with the US one. The inevitable result of all the above is - The euros yield advantage will be wiped out and the euro will fall.
1.40 Looks about the best we will see on the upside and we see a move back down below 1.35 and probably below 1.30 in the coming weeks and maybe even a move back to 1.25.
We have been short this big trend since 1.59, as regular readers of our reports know and it's a big trend and its not over yet; expect more weakness and more profits. Continue to sell the rallies on falling momentum and hold shorts.
Trading Opportunity - Dollar to Remain Firm on the Euro
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