Sunday, March 11, 2007

Is the dollar continuing to plunge?

Despite all the recent press about the "plunging" dollar, the dollar actually rose modestly against the euro this past week. Most of the "action" in foreign exchange is short-term trading and speculation and not based on long-term economic fundamentals.

The euro continues to "hover" near the $1.32 level waiting for major players to either push it higher or push it lower. Traders and short-term speculators can push the euro up and down within a relatively narrow range, but have to wait for the major players to do any heavy lifting. Now we wait and see if any of those heavy-lifters show up any time soon. They certainly were AWOL this past week.

One impetus for the euro pushing up against the top of its trading range is a belief that the Fed will soon cut rates, which would in theory make U.S. debt instruments incrementally less attractive than euro debt. That's the theory, but the Fed is not likely to cut rates any time soon and maybe not even over the next year, so short-term speculators who have pushed up the euro will likely grow impatient and abandon some of their long-euro/short-dollar positions. The better than expected monthly employment report on Friday took the wind out of the sails of the pro-rate cut crowd, causing the euro to fall a bit further below the $1.32 level of short-term resistance.

I wouldn't be surprise if speculators managed to push the euro up into the $1.33 to $1.35 range in the next few weeks whenever there is any bad news to focus on, but it is just as likely that they will trade it back down under $1.30 as soon as people grasp the truth that the Fed is unlikely to cut rates over the next six months.

In short, the dollar is not continuing to "plunge."

-- Jack Krupansky

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