Saturday, September 15, 2007

Euro finally inches cautiously above its trading range

The virtual unanimity on the view that the Fed will be cutting interest rates on Tuesday caused a modest decline in the dollar and a modest rise in the euro which finally dragged the euro modestly above its $1.33 to $1.38 trading range this past week. September futures for the euro closed at $1.3875 on Friday, 1.02 cents above the prior Friday close of $1.3773.

It will be interesting to see where the euro and dollar end up two weeks after the Fed does whatever it is going to do on Tuesday. I strongly suspect that the euro moved up over the past six months in anticipation of Fed rates cuts, so I suspect that traders and speculators may in fact do the old "buy the rumor and sell the news" reversal once the Fed does its thing. In other words, the run-up of the euro and the run-down of the dollar may in fact be near an end and could reverse within the next couple of weeks.

The December contract (which many traders will be shifting to as September winds down) rose to $1.3907 on Friday.

There are plenty of traders and speculators who would like to see the euro break $1.40, but whether there is really a net demand for the euro at these levels remains to be seen. For now, traders and speculators are waiting patiently to see whether the Fed will really cut the fed funds target rate significantly, which should in theory "weaken" the dollar.

Euro futures out at December 2008 were only at $1.3941 on Friday (compared to $1.3831 the previous Friday), so there isn't exactly a lot of "slam dunk" enthusiasm for betting on a $1.40 euro, so far. And that is evidence that some people are not convinced that a slew of fed rate cuts are really coming. It could also be a safe haven bid for the dollar as long as there is heightened global market volatility. So much for the theory that the dollar is "weak."

-- Jack Krupansky

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