Forex Investment and Currency Trading

This article from the front page of the FT helped to produce a blow-out low in the EURO in Asia hours (1.5284). The EUR shorts were then forced to cover, in Europe, when ECB vigilance on “rates-Thursday” appeared hawkish relative to the market expectations of some acknowledgement of a weakening economic situation in Europe.

There are two key comments in the article, however, that highlight the real situation for the Dollar…one is that Mr. Trichet (not Mr. Paulson) feels compelled to re-interate the US’ interest in a strong Dollar.  The other observation is that the US is a long way from being willing to intervene on the Dollar’s behalf.  In fact, the US has not intervened once in the Bush Administration and is proud of the fact.  Per John Taylor, who laid out this policy stance in the first five years of the Bush Treasury, before retreating to the Hoover Institution, this has been a resounding success.  The US is very unlikely to spend borrowed reserves to buy in Dollars unless or until there is a change in Administration.   The US has far fewer official reserves than most countries and would likely have to sell gold to raise EURO for intervention.

Note that the EURO now shows a key reversal on the charts, which will be fulfilled on a close today above yesterday’s NY close (1.5390).  The first target on a key reversal would be 1.5500.
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Europe and US unite on stronger dollar
By Krishna Guha in Washington and Ralph Atkins in Frankfurt
The US and Europe now have a united desire to see the dollar strengthen against the euro, senior officials have told the Financial Times.

Policymakers welcome the recent rebound in the dollar, which at one point on Wednesday rallied to a six-week high against the euro. They are concerned that the currency markets have been paying too much attention to short-term economic weakness and market stress in the US, and not enough to the medium-term prospects for the US and Europe, a senior US official said.

EDITOR’S CHOICE
The Short View: Euro and oil - May-07Comment: Bolder proposals needed for euro - May-07Lack of unity makes zone ‘political dwarf’ - May-07Wall Street drop sharpest in a month - May-07Pound drops to 10-week low - May-07The Short View: Crunchy credit - May-06Senior eurozone officials believe that the dollar-euro rate had reached levels unhelpful to both the US and Europe.

Policymakers on both sides of the Atlantic want to avoid a situation in which the dollar falls too far, before snapping back as investors realise the US is not heading for a depression and Europe’s economy is starting to soften, too. Such abrupt currency movements could fuel instability in financial markets.

Top officials also want to avoid dollar weakness reinforcing the rise in oil prices. They do not think the dollar is the main cause of the rise - oil has gained on days when the dollar has strengthened. But they agree that dollar weakness has at times contributed to oil’s strength.

François Fillon, French prime minister, told reporters last week in Washington: “We believe that the euro globally speaking is overvalued…the US authorities are repeating ad nauseam that the dollar is too weak.” Jean-Claude Trichet, president of the European Central Bank, has long stressed US interest in a strong dollar.

Officials highlight the importance of the April G7 communiqué, which expressed “concern” about “sharp fluctuations in major currencies”. Many analysts still reckon the US has a policy of benign neglect towards the dollar - welcoming the boost from dollar weakness to exports.

However, both US and European officials intended the communiqué to signal that they did not want the dollar to weaken and, in the context of a likely US recovery, feel it had reached the stage where it was oversold.

“The short-term was getting more attention than the long term,” the senior US official said.

The US is still a long way from agreeing to intervene in currency markets or identifying desired exchange rates. But both sides believe fundamentals and central bank policies are turning in the direction of relative dollar strength. After cutting interest rates aggressively, the Federal Reserve has indicated its desire to pause. Meanwhile, the ECB is softening its hawkish tone, and could shift further if weaker growth reduced inflation risk.

The central banks have not co-ordinated their policies to manage the exchange rate. But policymakers feel communicating the change in relative fundamentals and monetary policies may be effective.
Copyright The Financial Times Limited 2008