The Euro Is Resuming a Strong Uptrend

The U.S. dollar is again under pressure against major currencies, as China’s economy is on the move and might pull other leading nations out of recession. The demand for raw materials would reinforce inflation threats and reestablish the long term bear dollar’s cycle that started in 2001. In effect, crude oil is bottoming at current levels, while the European Central Bank (ECB) is possibly adopting a “wait and see” policy on rates.

Europe: low rate cycle over?

In what could be remembered as one of the most important days of this year, the European Central Bank (ECB) cut refinancing rate by 25 basis points to 1.00% on May 7^th meeting in Frankfurt. In the final speech, Mr. Trichet announces signs of stabilization for the Euro zone economy, although he forecasts the recovery to start only in 2010. In fact, the European Commission expects the Gross Domestic Product (GDP) to decline 4.0% this year and 0.1% in 2010. In addition, German Ministry of Economics anticipates the local Gross Domestic Product (GDP) to fall 6.0% this year before picking up in 2010. Lastly, for the sixth consecutive month, German unemployment increased month-on-month in April (+58,000), taking the annual rate to 8.3% from 8.1%. Non-conventional measures might soon be implemented, as ECB’s president anticipates the purchase of covered bonds and the beginning of a 12 month refinancing operation.

Last week’s decision could also mark the end of the long-lasting downtrend cycle of interest rates. It is not a secret that ECB has inflation’s containment as the main objective, annual M3 just declined to 5.1% from 5.8%, and current policy is justified only by the deep recession that is hitting Europe Nonetheless, the GFK market research group announced last week that German consumer confidence for May, based on a survey of about 2000 people, remained at 2.5 points, as it was in April. The data also confirmed that the economic sentiment for the entire Euro zone improved for the first time in one year, albeit current conditions stay weak. So, the economic tone remains critical in Europe, but the worst might be over. Let us see why.

China’s economy on the rise again

China appears to be quickly moving out of recession and for the first time since June the local’s manufacturing PMI expanded. The awakening of the Asian’s giant will increase the demand for raw materials, help the global economic growth and boost inflation. Crude oil, as an example, appears to be designing an interesting bottom at current levels that might inspire a rebound over the medium term.

In effect, European officials (French Finance Minister Christine Lagarde) are now concerned that a perception of a change might again penalize the U.S. dollar and support the Euro. Are they right? Eventually yes, if history repeats itself. Over the past 40 years, the U.S. dollar has shown the tendency to decline for about 8/10years before bottoming and current long term bearish trend started in 2001. Consequently, there is at least one stronger leg-down for the greenback before it reaches a time target and the new decline might shortly start. When? Against the Euro currency in particular, a move above 1.3840 could bring the price to 1.40, 1.44, eventually 1.60.

In reality, with the global growth on the move again, the U.S. dollar is no longer the “save heaven” currency. The large amount of money printed in the past months in the U.S. will exacerbate the inflation’s spiral and penalize the currency. However, some banks in the U.S. are beginning to lower credit standards on businesses and commercial real estate loans, since few key indicators start to manifest a slight better picture. The real estate market is leading the way, but other sectors are moving as well. The ISM non-manufacturing index increased to the highest level since October of last year and reached 43.7 in April (40.0 expected) from 42.2 in March. New orders climbed to 47, while employment moved up to 37 from 32.3. The ISM manufacturing index hit instead the highest level since September and new orders went to 47.2 from 41.2.

Comments

[DONE_SONZ:]

U.K. Might Lose AAA Rating at S&P as Finances Worsen
www.bloomberg.com/apps... The U.S. has the same warning.The fiats have more holes in them than swiss cheese.

May 21 06:32 AM