Posts Tagged ‘euro’

Dollar drops over the board

Sunday, September 16th, 2012

The bearish dollar trend continues. On Friday the euro settled above $ 1.31, its highest level since May, taking advantage of the weakness of the greenback after the announcement of a raft of emergency measures yesterday by the Fed.

The euro also continued to strengthen against the Japanese currency to 102.90 yen against 100.61 yen Thursday after hitting 103.02 yen earlier on Friday – its highest since mid-May. The dollar, however, comforted its gains against the Japanese currency to 78.37 yen against 77.48 yen Thursday. This is an exception as the dollar has weakened against the British Pound and Canadian Dollar among others.

The measures announced by the U.S. central bank were truly amazing and operators continue to enjoy the show proposed by Ben Bernanke, boosting financial markets and commodities. Describing a gloomy economic environment and continued high unemployment rate, the Fed has announced a new program to repurchase mortgage-backed issued by agencies of mortgage refinancing products. It is committed to redemptions of $40 billion per month, it will continue as long as necessary until the situation in the labor market improves clearly. It will also keep interest rates near zero until at least mid-2015. Quantitative easing in fullness.

Indeed, injections of liquidity by the Fed in the economy contribute to create money and therefore dilute the value of the dollar, while low interest rates make it less attractive against other major currencies. In addition, the weakening of the dollar is amplified by improved investor confidence in the eurozone, which has reduced their appetite for safe-haven currencies. The euro, which had greatly benefited from the measures of the European Central Bank last week and ahead of the German Constitutional Court for relief mechanisms in the euro area was strengthened by hopes of imminent request by Spain of a backup plan.

Positive signals have increased this week for the euro area, allowing finance ministers meeting in Cyprus to resume breathing before October when major decisions are expected for Greece and a possible rescue of Spain. The main reason for satisfaction within the monetary union was the green light Wednesday by the German Constitutional Court on the European Stability Mechanism (ESM), the permanent firewall future of the euro zone.

A momentous decision, which paves the way for the launch of the fund, with a lending capacity of 500 billion euros, which entered into force at the beginning of the summer and will be fully operational in late October. Through the firewall and the new debt purchase program of the European Central Bank, the euro area is better equipped to help members in need and deal with the debt crisis that still threatens to extend.

Considerable progress has been made at the national level. Enthusiasm by German Chancellor Angela Merkel and Italian Prime Minister Mario Monti have been acknoledged. As proof, the European stock markets ended the week in the green and the euro is back above $ 1.31, its highest level since May. The reasons for rejoicing were not limited to the green light for the firewall in the euro area. Liberal victory in Dutch legislation has also been interpreted as a positive sign, showing that the rhetoric of populist Geert Wilders Europhobic attracted less than expected.

All this opened the way for Greece to be granted additional time to recover its public accounts. Despite this lull, the eurozone is far from having turned the page of the crisis: the nightmare scenario of an exit by Greece may resurface quickly, knowing that the country’s creditors must decide in October on payment of a new tranche of loans to the country. For this vital aid, Athens must adopt new austerity measures to get more than 11.5 billion euros.

The fate of Spain also remains a source of concern. Madrid is under pressure to seek a bailout for its economy but fears the imposition of drastic measures. The country must also cope with the pressure of the street, as demonstrators coming from all over Spain poured into the streets of the capital shouting their anger against austerity. Also tens of thousands of people are expected on Saturday afternoon in Portugal. Greece and Spain are on the menu for the next meeting of finance ministers of the euro area in early October in Luxembourg and are likely to monopolize the European leaders who will meet at a summit on 18 and 19 October.

The demise of the US dollar

Thursday, October 29th, 2009

The theme of the weakening dollar is heralded in all news media.

This is nothing new to be honest and this was said years ago, even decades ago, until the dollar strengthened and then weakened ago.

Abandoning the dollar as the main international currency is a topic probably older than most currency traders nowadays. But years after years the dollar remains the main currency for forex trading, real goods trading, commodity trading in particular crude oil, currency reserves, etc. And if you travel and believe me I have traveled, and if you can only carry one currency with you, which one do you think it is going to be? Ok, ok sometimes the euro is more accepted such as in old French colonies in Africa, but this is by far the minority.

So why do people keep on writing thousands of pages and blogs about the demise of the dollar? The short answer I guess is people do not learn. Anyway the slightly longer answer is you need a currency to replace the dollar. It is not going to be the euro, because the euro is still a new currency (ten years old!) and even a large portion of Europeans do not like the euro, and it would be hard to convince the rest of the World to make it the reference currency. Yes one reason they do not like it is that it has induced concealed inflation.

You see, you need one currency to replace the dollar, and that currency has to be strong. The dollar will not be replaced by a smaller currency. Using a basket of currency to replace the dollar will never happen either. Why? Because a basket is not a currency in itself, it is an artificial creation with no relation to a real physical reality. The dollar is the dollar because it is backed by the power of the United States economy and population and army. Three not small backers. Baskets never have and never will be trusted and be able to compete with a true currency. Historically they have never worked. Just take the example of the predecessor of the euro, the ECU. It failed like all baskets, because the weaker elements in the basket make the basket fail.

So the point is only a currency can replace the dollar and it has to be strong. I just explained that the euro is not ready, far from it. What are the other strong currencies. The British Pound and Swiss French are way too small and local currencies to be even considered. The real serious contender is the Japanese Yen, and here again it cannot and will never replace the US dollar. First Japan is less than half the size of the US economy. Japan has no military. The Japanese Yen is not use as a currency for trading, unless one Japanese counterpart is involved in the transaction as buyer or seller.

So here we are, keep on printing pages after pages saying that crude oil will soon be traded in another currency like you have been saying for over ten years, and I am still waiting.

Wait, wait. So that is it? The truth is yes that is it. I hear someone say the Yuan. Please do I need to answer that? It is not even a freely traded currency please.

Summary: the dollar will remain the dominant world currency as long as there is no candidate for its replacement.