Tags: sean | hyman | dollar | euro

Dollar to Strike Back Against Euro

By    |   Monday, 18 Jan 2010 02:26 PM

The tables are about to turn.

For the longest time now, the dollar has fallen against the euro.

However, we’re in the process of the turning of the tide right now.

How can this be?

The problems in the euro zone continue to escalate.

At first, many people thought that Greece's problems would not get out of hand. I must admit that at first, I didn’t think they’d be a huge problem either.

However, Greek debt has grown to far more than the acceptable levels to be a part of the euro. So, they’ve either got to get those levels down (which I don’t think they can do fast enough) or they have to exit the euro.

Wow! Well, what happens if one or more countries have to exit the euro?

The sentiment in that region drops tremendously. It will appear that they are digressing rather than progressing.

Investors and traders alike will scamper out of the euro first and ask questions later as they view things from the sidelines.

Therefore, this will cause an unwinding of positions and reverse the euro/U.S. dollar exchange rate from its steep climb into a downward spiral.

On top of all of this, the inflation in the euro zone hasn’t been that bad yet at all.

However, that cannot be said about the United States.

While the euro zone’s inflation rate is at 0.9 percent on a year over year basis, the United States has a whopping 2.7 percent rate of growth to their inflation.

Once the U.S. inflation gets into the 2 percent to 3 percent level, rate hikes are typically not far behind.

Now, some may say that we won’t raise interest rates for a long while because the unemployment rate is high.

Normally, that would be true.

However, the inflationary part of the stagflation that we’re going through right now is about to get out of control and it will force the hands of the Federal Reserve.

That’s why there’s talk, even now, of U.S. rate hikes. But in the euro zone, Jean-Claude Trichet, President of the European Central Bank, says interest rates are at “an appropriate level.”

Of course they are.

Inflation has been tepid there so far in relation to many of the other G-8 countries.

So, inflation will rise faster in the United States than it will in the euro zone.

Therefore interest rates will rise sooner and faster in the United States than that of the euro zone.

As the woes continue in Europe and its rates stay low for a bit longer, and as the United States embarks upon a rate hike cycle in the months ahead, it will put the nail in the coffin for high euro/U.S. dollar exchange rates as the short sellers of the pair take over and drive the pair downward off of the basis of the changing fundamentals.

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SeanHyman
The tables are about to turn. For the longest time now, the dollar has fallen against the euro. However, we re in the process of the turning of the tide right now. How can this be? The problems in the euro zone continue to escalate. At first, many people thought...
sean,hyman,dollar,euro
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2010-26-18
Monday, 18 Jan 2010 02:26 PM
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