Whats up with the dollar?


Seems like the dollar is on a dangerous skid. The greenback fell almost 2% against a basket of major currencies in the week after the Federal Reserve cut America's short-term interest rates on September 18th, hitting a new low for the post-1973 floating era. The fall was particularly pronounced against the euro, where the dollar fell to a record $1.41 per euro on September 25th.

Inflation is also rising fast in Saudi Arabia the link to a falling dollar is causing a growing headache. The inflationary risks from a weaker dollar are also easily overdone. Most economists reckon that the pass-through from a weaker dollar to higher import prices has weakened in recent years, and is particularly low in America.

Today's pessimism is centred on America—hence the tumbling dollar. But there may soon be reasons to worry about Europe. Germany's Ifo index of business confidence fell again this week for the fourth consecutive month, to a 19-month low. The aftershocks of the credit crisis coupled with a surging euro could make life difficult for Europe's firms.


I guess it's a case of whose long term fundamentals are worse - Europes or Americas.

Business confidence is down in Europe but look at what's happening with the US:

- Financial Crisis' abound with the sub prime mess.

- The spiralling cost of the Iraq war along with the increasing likelyhood of a war with Iran. Diplomatic negotiations are the talk of the day with the US govt however that wont mean a thing if Israel attacks Iran as the US will most likely be dragged in as Hezbollah launches counter attacks against Israel and America will feel obliged to help out their strong ally.

- Financial Markets are at extreme levels but being kept falsely bouyant by the rate cut and large companies such as McDonalds overseas earnings where they are making a killing due to the exchange rate.

- Someone like Warren Buffet doesn't buy billions of Euros because he likes the smell of their money or is unpatriotic.

And lastly George Bush stating as fact that he will do nothing to kerb the extreme tumbling of the dollar instead preferring to stand aside and let it take its own course.

No predictions from me but the future doesn't look bright.

Also check out daily/weekly charts of the EUR/USD and GBP/USD pairs.

Doji after a short term downtrend right on and SMA on the Euro pair and a break of the head and shoulders pattern then resistance level bounce on the daily chart of the GBP pair.

Strong uptrends on the weekly's of both pairs.

This week will be interesting but I'm betting the long term uptrend on both pairs still has a bit of juice left in it. For the short term anyways.

On the other side of the coin - COT is moving towards extreme divergence and like you say Getevensteven, a high Euro would be a death knell for many European companies so if Trichet decides to intervene, there will be an interesting battle that will ensue between the bulls and bears.

In the following weeks there maybe a bit of a correction bit still too hard to tell.
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