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Where next for the euro/dollar rate?
Given the mess in the eurozone, the euro/dollar rate just goes to show how weak the dollar has been, says Chris Towner of HiFX.
As the sovereign debt crisis intensifies, so has the weakening trend in the euro, especially now that we are dealing with the larger economies such as Spain.
Since the the euro was launched back in January 1999 we have seen this currency trade against the US dollar down to levels below 0.80 and up to levels above 1.60. As such it is no real surprise to see the euro/dollar rate drifting towards the middle of this range, close to 1.20.
When the euro was launched the opening euro/dollar level was 1.1740, which just goes to show how weak the US dollar has been for this currency pair to drop close to this level amid the mess in the eurozone.
And where from here? If we accept that we are close to the middle of the range for the euro since inception and that the 1.20 area is neutrality, the real question is whether the euro should weaken further, or whether it will encounter good demand between 1.1700 and 1.2000.
After all, we have really just returned to the beginning. If this level is there to remind us of the inception of the euro, it is interesting to think of where the euro would be trading if the EU countries had all become fiscally aligned back then.
And this leads us on to the state of the German economy, which has proved to be the biggest beneficiary of this larger single currency union. What is always in the back of traders' minds when they are selling or shorting the euro is the fact that they are selling Germany, and given the high standard of goods that Germany manufactures, this weighs somewhat on the conscience.
On top of this, the lower the euro goes, the more competitive German goods become, so one can expect that below 1.20 the euro will start to regain its footing.
US under pressure too
The foreign exchange markets are ratio markets, and despite the spotlight being off the US recently, its economy is showing signs of slowing growth, putting pressure on the Federal Open Market Committee to re-open its medicine cupboard looking for further stimulative measures.
This, alongside an election campaign that is expected to be a fraught with tension, is expected to put some further pressure on the US dollar. We expect the current weakness in the euro to run a little further, but then the market may re-focus on the long-term pressures for the US dollar.
That’s the beauty of the foreign exchange markets: one always gets to compare one currency against another, and if both are weak it becomes a comparison of which one should be weaker. Sub-1.20 in euro/dollar and this choice gets a lot tougher.
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