Saturday, December 09, 2006

The euro and the dollar, revisited

The week before last we saw a dramatic rise in the exchange rate of the euro relative to the U.S. dollar, but this past week the exchange rate basically went nowhere, other than both up and down in almost equal measures. In other words, the "trend" from the week before last was not sustained. It is still too soon to judge whether this past week was merely a breather before a continued advance, a pause before a decline, or whether the exchange rate has reached a stable level.

Since the initial momentum has petered out, the short-term momentum speculators may begin to lose interest unless there really is a sustained movement of dollars to euros.

I suspect that the exodus from dollars was driven in large part by an expectation that the Fed would be cutting interest rates within a few months. But as that rate-cutting expectation continues to evaporate in the face of better-than-expected economic data, money flows could reverse at least somewhat and flow back into dollars.

-- Jack Krupansky

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