Coelacanth

A Closer Look at the Dollar Rally

As a matter of fact the euro-zone trade deficit has been ballooning in the most recent reads due to increased imports and lower exports (a strong euro has been killing exports)

All democracies see an erosion in their manufacturing base as they mature but this isn't the main catalyst to a currency's rise or fall.

Yes...Spain, Ireland & England are all seeing an huge unwinding in their housing markets. 15% of Spain's GDP is it's housing sector. Ouch!

You're minimizing the euro-zone's weakness.....industria... production, manufacturing, consumer spending/sentiment & retail sales have all fallen off a cliff and point to pronounced future economic weakness. Many economists are now saying euro-zone growth probably contracted in the 2nd qtr. In addition, euro-zone businesses are increasingly defaulting on their commercial loans.

A massive slowing in consumer spending suggests the euro-zone isn't currently consuming "half of it's own production". Additionally exports to emerging markets are slowing and England, where roughly 15% of euro-zone exports have gone in the past, is pulling in the purse strings.

Well....you don't have to guess or invent conspiracy theories for why the $ has had such a spectacular run of late.....most folks in trading circles know why. After the ECB's rate decision last week (and in particular Trichet's accompanying statment and news conference) investors began paring back bets the ECB would hike rates again.....to boot, based on medium term fundamentals, the euro is ridiculously over-valued against the dollar.

It's not so much dollar strength you're seeing as much as the euro losing value relative to other currencies....understa... the difference? Yes, it is based on fundamentals....namely the deteriorating fundamentals out of the euro-zone. Most if not all the bad news has already been priced in to the dollar.....can't say the same for the euro.

Has the Dollar Bottomed?

German consumer confidence at a 5 year low, Euro-zone & German June PMI reads all below 50 (denoting a contraction of manufacuturing), German Business sentiment IFO reads dropping below the psychologically important 100 mark, Industrial output for the euro-zone falling 3 months straight, French consumer spending falling off, etc.......many economists out of the euro-zone are now saying the EU block probably contracted in the 2nd qtr. (As a reminder.....the U.S. hasn't experienced negative growth yet)

One could argue that between the euro & dollar it's a "battle of the ugly ducklings" at the moment but it seems clear to me, despite all our troubles that are pretty much all priced in to the buck by now, that the euro is wildly over-valued relative to the dollar and yen given their medium term fundamentals.

It won't be a straight line but don't be surprised to see the euro around the 1.45 - 1.50 handles in 6 months to a year.....if even that long.

Confluence of Factors Boost Dollar Wednesday

It's the Elliot Wave made flesh.

Despite the dour mood of CEO's at financials recently reporting 2 qtr. results ,none the less, investors are eagerly lapping up all their shares. Didn't that happen in the 1st qtr. too?

A Surprise in Store for the Dollar?

What I love about days like today is how no one is paying attention to a rapidly deteriorating situation in the euro-zone.

As Ms. Lien correctly points out.....French, Italian (and Germany) all showed pronounced weakness in their industrial output for May and there is every indication that the euro-zone may have contracted in the 2nd qtr. (As a reminder...the U.S. hasn't experienced negative growth yet).

Too boot, Mr. Trichet has indicated that he is willing to tolerate a flaring up of inflation in the short-term to see it moderate in the medium term (early to mid-09). IMO as the fundamentals continue to deteriorate in the euro-zone, traders will begin to "price-out" further rate increases and the euro will fall in value.

IMO the greenback appreciating against the euro will be less a reflection of dollar strength as much as it will be a reflection of the euro losing value against other currencies.

It's a contrarian play and a bit dicey but I think a trader could make a very good case for shorting EUR/USD from the 1.59 - 1.60 handles.

Good work Ms. Lien.