Saturday, April 21, 2007

Euro now in uncharted territory flirting with the $1.37 level

After sprinting above the $1.34 and $1.35 levels the previous week, the euro inched its way above $1.36 this past week and is now cleanly in uncharted territory. After the June 2007 futures contract closed at $1.3573 a week ago Friday, this past week the euro only managed to creep up a mere half-cent to $1.3628 (actually 0.55 cents.) This was primarily a technical move, but there is probably still a fair amount of anti-dollar speculative hot money chasing after the euro and any other non-dollar currency. There appeared to be little appetite for pushing up through the more difficult $1.37 level.

There is no good economic fundamental reason for the euro to trading with this upwards bias, but strong anti-dollar investor sentiment has continued to ignore underlying fundamentals.

Now, the euro is in truly uncharted territory. It's now mostly a question of the level of speculative money flows. With a lot of people still misguidedly believing that Fed rate cuts are still likely over the next six months, the flows could be net-euro for some time to come. On the other hand, just a few good economic reports, persistently high energy prices, strong talk from the Fed about fighting inflation, and a strong hint of a rate hike in June or August, could quickly sap the staying power of any over-extended speculators.

$1.37 is within striking distance for euro speculators, but the shortness of that distance is far less important than the strength and durability of speculative money flows that can evaporate and reverse on a dime.

I wouldn't be surprised if speculators managed to keep the euro up in the $1.33 to $1.37 range for 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 very unlikely to cut rates over the next six months.

In short, the dollar is not "plunging."

-- Jack Krupansky

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