Saturday, June 16, 2007

Euro continues to drift sideways with some weakness

The euro continues to drift sideways in the $1.33 to $1.38 trading range. It did in fact break below the narrower  $1.34 to $1.37 range, but not dramatically enough and long enough to constitute a true breakdown. For now, the overall trend is neither up nor down, but "sideways." Euro futures closed on Friday at $1.3419, 0.53 cents above the $1.3366 level of a week ago. I strongly suspect that the recent "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 some people still misguidedly believing that Fed rate cuts are still likely in the Fall, 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, a decent Q2 GDP report in July, and a strong hint of a rate hike in August or the Fall, could quickly sap the staying power of all but the most diehard of over-extended speculators.

I wouldn't be surprised if speculators managed to keep the euro up in the $1.33 to $1.37 range as long as 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 they begin to deeply grasp the truth that the Fed is very unlikely to cut rates over the coming year.

In short, the dollar is not "plunging." [And I will continue to repeat this line until The New York Times admits that they were wrong for claiming that the dollar is "plunging."]

-- Jack Krupansky


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