Sunday, May 13, 2007

Euro is drifting again after failing to break through the $1.37 level

After a couple of weeks struggling to break through the $1.37 level, euro bulls and dollar bears finally threw in the towel and the euro drifted back down within the $1.33 to $1.37 trading range, with euro futures closing on Friday at $1.3546, more than a half-cent below the $1.3616 level of a week ago. I strongly suspect that this "retreat" was more of a short-term trading phenomenon and not indicative of a longer-term trend per se. I would give the euro bulls and dollar bears a few more shots at $1.37 and $1.38 over the next month before concluding that the euro is likely to weaken for the rest of the year.

For now, the euro remains in relatively uncharted territory. It is 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.

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 superficially 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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