A change in investor’s sentiment towards more risk taking has been helping the euro to demolish the safe-haven status of the US dollar. Today, the EUR/USD gained 71 pips in few hours but one has to look at a longer term chart to really understand the magnitude of the EUR/USD up trend. The euro rallied more than 1700 pips since January trading from a low of 1.2544 in March to as high as 1.4337 in June. Having said that, the euro starts looking very expensive, in particularly for European exporters who have to compete against American companies for a share in global trade. Looking ahead, we expect a considerable deterioration of the euro zone economy which could lead to a significant shift of interest rate differentials in favor of the U.S. dollar.
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Dollar Falls Despite Better than Expected Consumer Sentiment[/B]
This Friday, the US dollar lost ground against the world’s most heavily traded currencies despite the release of better than expect data for personal income and consumer confidence. Personal Income for May came in at 1.4 percent from 0.7 percent in the previous month and the University of Michigan Consumer Confidence indicator came in at 70.8, higher than expected. Foreign exchange traders were not particularly excited in these numbers and the euro appreciated 80 pips against the dollar to trade as high as 1.4180 from 1.3986 on Thursday. Also, the USDJPY lost more than 70 pips to trade as low as 95.04 yen. This has been a particularly volatile week for currency trading which makes it even more difficult to identify the fundamental triggers behind such moves in exchange rates. Nevertheless, several months of quantitative easing combined with expectations for a record high budget deficit are beginning to weigh on the US dollar exchange rate. Earlier in the day, Chinese officials reiterated their call to replace the U.S. dollar with a new global reserve currency and many countries are becoming increasingly concerned about their investments in US treasuries. Moreover, this week we learned that the Federal Reserve will continue to provide support to mortgage lending and housing markets by purchasing a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. However, the US dollar is likely to remain under heavy selling pressure until the US Federal Reserve presents a clear exit strategy for quantitative easing.