Could 1 Euro Equal 2 U.S. Dollars?

The fourth time is the charm for the Euro as it finally pierces the 1.60 level against the US dollar. Despite slightly better than expected existing home sales in the US, a rebound in house prices, and news that the German Banking Association bailed out Duesseldorfer Hypothekenbank AG after a string of mortgage losses, the market refuses to give up its voracious appetite for Euros.

The latest bout of Euro strength or dollar weakness can be partially attributed to the sharp rise in oil prices, which hit $118.36 a barrel this morning. Before you know it, oil prices could be trading at $125 a barrel. This continual rise in inflationary pressures raises the risk of a rate hike from the European Central Bank.

This morning, ECB member Noyer said that the central bank will do what is needed to control inflation, including raising interest rates. Although he tried to temper that comment by saying that rates are currently appropriate, the seed has been planted.

Where is the Euro Headed Next?

Although 1.60 is a psychologically important level, it will not mark the end of Euro strength and dollar weakness. Speculators will continue to take the currency higher until ECB starts to wince. Unfortunately that may not come until another few hundred pips.

Don’t expect any verbal intervention from the ECB, let alone physical intervention anytime soon. Economic data has been stable allowing the central bank to bask in the benefit that a strong currency has on inflationary pressures. The next best alternative to combating inflationary pressures would be to let the currency continue to appreciate.

Whether or not the dollar’s weakness and the Euro’s strength can be sustained will be dependent upon who shocks the market first - the US or the Eurozone.

Next week the Federal Reserve will be meeting to decide on interest rates. If they cut by only 25bp, that would be a sharp departure from their previously aggressive moves, suggesting that the central bank is slowing down.

If a major European bank reveals large losses that may have previously been hidden by lower LIBOR rates, the ECB may be forced to follow in the footsteps of the Bank of England and the Federal Reserve. Another attempt to add liquidity to the markets would indicate that the ECB is concerned about the health of the financial sector, which would make a rate hike out of the question.

Interestingly enough, there are not as many option barriers according to the volatility smile as there was at 1.50. This suggests that extension may not be as sharp. When the Euro broke 1.50 it rallied another 144 additional pips on the very same day and then added 300 pips over the next few weeks with virtually no retracement. Therefore the power of the move above 1.60 will not be as strong as the move above 1.50. In fact, 1.60 could even be a near term top. There is no need to be worried about 1 Euro equaling 2 US dollars anytime soon.

Comments

[special1person]

Could 1 Euro Equal 2 U.S. Dollars?

Why stop there?

If Cheney gets his wish to nuke Iran, could 1 Euro Equal 20 U.S. Dollars?

200?

2000?

20,000?

200,000?

Of course, this mindless speculation will end on 01/20/09 or when Cheney is frog marched off to prison in Nuremburg.

[Coelacanth]

I agree. From these levels I think the Euro's upside is limited. This may get further confirmation later this week.

I'll be looking very closely at the German Purchasing Manager Index figures for April, Euro-zone Industrial Orders for February and German IFO Business climate (for April) reads later this week. If any of these show marked weakness, we may see the Euro temporarily come off these levels as it finally dawns on people that the Euro-zone is slowing down.

Just me but I'd be very nervous being long Euro right now.

[Investor612]

It never ceases to amaze how incessant the dailykos-can'tmoveon.o... crowd is about foisting their idiot political drivel on investment and other forums. How this creature "special1person&q... ever reached the conclusion she/he (it?) was in any way special remains a complete mystery.

lOng term the value of the dollar and the euro are likely to suffer against other currencies as both the US and the western Euros face looming entitlement obligations they cannot meet.

[Piggybank]

quote/ The latest bout of Euro strength or dollar weakness can be partially attributed to the sharp rise in oil prices, which hit $118.36 a barrel this morning. Before you know it, oil prices could be trading at $125 a barrel. /quote

Before you know it, oil might get traded in Euro's. :p

Seriously though, As European i think the ECB is doing a good job. And i'm lucky we don't have such inept leadership like this current Bush administration. but i think most Europeans are expecting the Dollar to stabilize and improve with new leadership in the USA after the ellection. However it's still a while from now, and atm American financial sector might need a lot more money and it can push the dollar somewhat lower still. However i am far from a economist or analyst to be sure about these thing's.

That said i think the credit crisis will inpact Europe far less than it will inpact the US economy, although afcourse were linked heavily economicly. But this punctured bubble was mainly an USA one.

[Investor612]

As European i think the ECB is doing a good job. And i'm lucky we don't have such inept leadership like this current Bush administration.>Pig...

Thanks for the laugh. Our "incompetent leadership" has produced more new jobs in the last 6 years than all of western Europe combined, even though you have a population 50% greater than our ors.
To paraphrase a great Euro leader of the past, "Never have so many been so self-impressed by so little" as regards the self-anointed enlightened in the museum societies of Western Europe as they march in blissful ignorance down the path to demographic extinction.

Only Finland and Denmark are sure bets to escape the Islamic crescent that will fly over the rest of the EEC sphere by mid-century. Perhaps Germany and Norway can save themselves too, but the rest have birth controlled their way to oblivion, replacing the babies they couldn't be inconvenienced by having with immigrants who hate them.

And those cushy retirements and long vacations Euros have become so complacent with? Don't expect the new arrivals to pay for them. Your looming entitlement crisis is even greater than ours and it will drive both our currencies down.

[Ops did itagain]

I would think that id the dollar keeps dropping the EU will impose tariffs on US and Chinese imports to protect their industries. Anyone suspects the same?

[AmesTiedeman]

The answer is yes within 36 months.

Version 2.0 of the Euro coming.

[icandoitdon]

the collapse of the dollar, i'm sure, is caused by a number of factors not the least of which is confidence. if people believe the american economy is strong and growing they wil record that view by investing in and holding dollars. if not they won't.

investors and speculators have placed their bets and if their votes are meaningful, the american economy is weak and getting weaker.

the loss of confidence in the dollar has to be laid at the doorstep of the administration in power...bush/cheny for the last 8 years...the american congress...and the federal reserve. collectivey these are the powers that hold the key to america's economic future and the future of the dollar.

the conventional thinking of the powers that be seems to be that a weak dollar helps american exports, which outweighs the correllary domestic inflationary effect of a weak dollar policy, partly because of an ever-cheaper supply of labor, whether through legal or illegal immigration and a long term securlar trend toward de-unionization in america. the inflationary effect is also partly mitigated by greater productivity to the extent that more economical manufacturing methods, whether at home or abroad, are be passed on to end consumers.

but there is limit to how far a the dollar, as the "reserve currency" can fall before it becomes destructive to the world economy. if the dollar falls too far it can overwhelm consumers with higher inflation, result in capital flight from america and, as mentioned, tariffs to protect industry that must compete against american imports.

at what point do we get there? that is the great question that nobody i've heard seems to have an answer to. i'm wondering if the answer is even known. but i suspect we'll feel it when it comes....




i wouldn't say adding new hamburger flippers, diswashers and government workers contributes much to the american economy.

belittling well, now i understand the problem in the u.s. it's those damned entitlements. in fact, if not for the @)&*%$ entitlements we'd actually have the money to pay for the war we're fighting instead of going hat in hand to our "friends" the chinese and the arabs. hell, we might even have enough left over to rebuild the military we’ve decimated in our passion to overthrow that badass saddam, who threatened our way of life.

somebody should tell bush/cheny that if they get rid of the entitlements we can afford more wars. They appreciate simple solutions to complex problems.

[icandoitdon]

as for the last part, of my post please disregard it. it was random thoughts that i had earlier decided were irrelevant to the topic at hand.

[01GTvert]

get your head out of your ass invester_612. Those 6M jobs you speak of are fast food and quickie hair cut jobs.....$8/hr tops. These jobs replaced the $20/hr jobs we used to have before our leaders sold us down the river by outsourcing them. Is this the face of a stong economy? Trading $20/hr manufacturing jobs for $8/hr "do you want fries with that jobs?" Hardly...

[Investor612]

get your head out of your ass invester_612These jobs replaced the $20/hr jobs we used to have before our leaders sold us down the river by outsourcing them. Is this the face of a stong economy? Trading $20/hr manufacturing jobs for $8/hr "do you want fries with that jobs?" Hardly... >01GTvert

Funny how in inflation adjusted dollars the median income has risen given what you claim about jobs. Perhaps if you got your info from somewhere other than the DNC you wouldn't assume others keep their heads in the same foul location where yours has apparantly taken up permanent residence.

[Mr. G]

Through all the rhetoric, the reason the dollar is weak is more than just sentiment, increasing money supply deflates the dollar and is primarily responsible for commodity inflation. The other major factor is worldwide demand that is rising exponentially. As US policy insists on deficit spending, the treasury has to print more money. What happened to conservative policy to reduce tax and spending?

[BW]

I'm traveling to Cannes, France at the beginning of June. When would the best time be for me to convert to Euro for my trip? Does it matter?

[icandoitdon]

doesn't matter. you're too close to your travel date to have it make much of a difference.

[BW]

I thought so I just thought I'd ask.

[mark r]

americans are so bitter and divided...greed really speaks volumes in the american discourse....divided we fall....

[clitosil]

Again, it's amazing when people discuss the strength of the dollar and also mention oil prices, but they never make the connection between the two. Once oil stops trading in dollars and the oil producers (as well as china) remove their dollar pegs, all hell will break loose.

I even think there is a distinct possibility the US gov WILL default. Think of it in terms of a home owner who has trouble servicing his loan and the value of his house just dropped below the loan basis. What would it be in the best interests of the borrower to do?

Walk away.