Riding the Euro/Dollar Rollercoaster, For Now

By Sean Hyman

If you want to see recent volatility in action, then you need to look no further than the euro (EUR/USD spot FX currency pair). This thing has been all over the map lately.

Check out the chart below.

Welcome to the euro roller coaster!

Since December alone, this pair has gone from 1.25 all the way up to 1.47 and back down into the 1.25ish realm once again. Wow!

I mean, you almost snap your neck just following the chart!

Trichet has to hate Moody’s right now!

Why all the euro volatility? Moody’s said today that it may cut the ratings of several banks in eastern Europe, especially the Austrian banks. This is only adding to concerns about the financial turmoil deepening.

On top of this, Moody’s has already downgraded the debt of Ireland as of January 30th.

So the Moody’s report today has caused the euro to plummet and its driven more money into the “safe haven play” of the U.S. dollar at the same time. This acts as a “double whammy” for the EUR/USD currency pair as it causes a fresh bout of “risk aversion” to return.

Yet another negative for the euro is the huge possibility now for even more rate cuts that could come out of the Euro Zone. The lower interest rates could cause even more money to pour out of the Euro Zone and head into other regions of the world.

If the euro breaks the 1.2350ish level, I think we could easily see the unraveling of the euro take the pair down to the 1.16 - 1.18 area. That would be lows not seen since 2006.

Dollar/Yen

This huge fall out from major currencies around the world has pushed money into the U.S. dollar and Japanese yen. However, it appears that the yen trade is weakening while at the same time gold is breaking out to the upside.

I think many savvy traders who have been “long” the yen now fear that the yen could fall and they would lose the ground that they’ve gained by being yen buyers. Therefore I think they are repositioning in the near term into the dollar and even more so into gold.

If so, this could mean in the near term that the dollar and gold continue in the same direction. This can’t last forever because historically they trade opposite one another over long periods of time. Therefore, I think that gold has the new edge since it recently broke to the upside.

Once the rise in gold finally does “catch up to the dollar”, then currency pairs like EUR/USD and AUD/USD will rise again. This will probably coincide with better sentiment hitting the market as the U.S. government gets its head out of its butt and does something finally with the banks and stimulus package.

However, in the meantime, it looks like the order of the day goes to the short sellers of these pairs as “dollar strength” still reigns in the near term.

While this is the case today, be on alert for the shift in the “balance of power” against the dollar once the huge increases in the money supply and zero interest rates really take hold in the “real” economy.

Comments

[morph366:]

The Japanese yen is falling out of the safe haven matrix - during Tuesday's sell-off we had the unusual spectacle of a rising dollar, buoyant gold and a flight to long term Treasuries. In the longer term, being long all three asset classes is an unsustainable play but in the short term it captures the fact that many, especially in Asia and the Middle East are seeking out what they consider to be the best places to hide out while the seismic rumblings continue.

Feb 19 06:45 AM

[FXedu:]

Yeah, the yen is losing its luster quickly. Gold has broken out of a downtrend recently and it won't be long before it takes out new all time highs. This may also eventually catch up to the dollar and act as "ankle weights" around it. The dollar index is one to watch...appears to be double topping right now..but too early to say for sure.

Meanwhile USD/JPY is rallying hard.

Thanks for the comments.


On Feb 19 06:45 AM morph366 wrote:

> The Japanese yen is falling out of the safe haven matrix - during
> Tuesday's sell-off we had the unusual spectacle of a rising dollar,
> buoyant gold and a flight to long term Treasuries. In the longer
> term, being long all three asset classes is an unsustainable play
> but in the short term it captures the fact that many, especially
> in Asia and the Middle East are seeking out what they consider to
> be the best places to hide out while the seismic rumblings continue.

Feb 19 09:26 AM

[Steve in Gr...:]

"...This will probably coincide with better sentiment hitting the market as the U.S. government gets its head out of its butt and does something finally with the banks and stimulus package...."

The U.S. government extracting its head (before the 2010 elections) will also coincide will hell freezing over.

Feb 19 09:40 AM

[FXedu:]

haha, funny...and you're probably right.


On Feb 19 09:40 AM Steve in Greensboro wrote:

> "...This will probably coincide with better sentiment hitting the
> market as the U.S. government gets its head out of its butt and does
> something finally with the banks and stimulus package...."
>
> The U.S. government extracting its head (before the 2010 elections)
> will also coincide will hell freezing over.

Feb 19 01:40 PM