Why the US Will Keep the Dollar Down and the EURUSD will Break 1.5000, at least for Now
THE ALMIGHTY DOLLAR
Policymakers in the United States usually claim that they are in favor of a strong dollar. We often hear that a strong Dollar is in the best interests of the world, especially Americans.
Now let’s talk about the truth: US Policymakers are very pleased that the dollar is weak and getting weaker.
Why? The theory is that a weak dollar at this point in the business cycle will actually benefit the United States, ignoring the risk that foreign investors will lose faith in the greenback and not buy U.S. debt. It works like this: a weak dollar helps exports while curbing imports. Besides reducing the US trade deficit, a weak dollar gets people to buy less, especially from other countries.
This is definitely a plus for industries like the US auto industry, which has seen many customers abandon their products for cars made abroad. It logically also benefits many of their suppliers. About half of American companies’ earnings are generated abroad. The stronger other currencies are versus the USD, the more attractive American products are to foreign countries.
A weak dollar also reduces the need for U.S. firms to outsource, and fire American workers. If the dollar gets weak enough, some jobs might actually be brought back to the US.
As for the risk that foreign investors will lose faith in the greenback, essentially no other currency rivals the dollar when it comes to safety and ease of moving funds in and out. So this is not seen as a huge risk.
But what about all of the businesses that rely on imports for re-sale to the American consumer? These businesses will undoubtedly need to raise their prices, making non-US goods much more expensive for the consumer. This brings up the potential by-product of inflation.
According to Economics 101, the value of the dollar (or any other currency) is determined by supply and demand.
Today, world financial markets are overloaded with dollars due to the actions of the Federal Reserve. But lately, the central bank has been hinting about taking some of these dollars back, once it thinks that the economy is in recovery mode. Eventually, it will be forced to do just that, especially if the weak dollar leads to inflationary concerns.
Does this suggest that the battered buck is more likely to be stronger rather than weaker a year or two from now? Yes. As dollars become less plentiful, their value will rise as will foreign investor willingness to hold them. The threat of inflation will diminish as well.
Easy forex bottom line: Near-term expect the dollar to continue to suffer. The EURUSD looks headed towards breaking the critical 1.5000 level, and will encounter some selling pressure at 1.5010. Looking out one to two years, don’t rule out a sustained Dollar rebound.
EURUSD : Support 1 – 1.4920 Support 2-1.4850 Resistance 1- 1.5000 Resistance 2- 1.5010
10/20 Market Commentary
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Tags: 10/20 Market Commentary, dollar, Dollar Down, easy forex, EURUSD, THE ALMIGHTY DOLLAR
This entry was posted on November 29, 2009 at 2:09 pm and is filed under 1. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
THE ALMIGHTY DOLLAR?
Why the US Will Keep the Dollar Down and the EURUSD will Break 1.5000, at least for Now
THE ALMIGHTY DOLLAR
Policymakers in the United States usually claim that they are in favor of a strong dollar. We often hear that a strong Dollar is in the best interests of the world, especially Americans.
Now let’s talk about the truth: US Policymakers are very pleased that the dollar is weak and getting weaker.
Why? The theory is that a weak dollar at this point in the business cycle will actually benefit the United States, ignoring the risk that foreign investors will lose faith in the greenback and not buy U.S. debt. It works like this: a weak dollar helps exports while curbing imports. Besides reducing the US trade deficit, a weak dollar gets people to buy less, especially from other countries.
This is definitely a plus for industries like the US auto industry, which has seen many customers abandon their products for cars made abroad. It logically also benefits many of their suppliers. About half of American companies’ earnings are generated abroad. The stronger other currencies are versus the USD, the more attractive American products are to foreign countries.
A weak dollar also reduces the need for U.S. firms to outsource, and fire American workers. If the dollar gets weak enough, some jobs might actually be brought back to the US.
As for the risk that foreign investors will lose faith in the greenback, essentially no other currency rivals the dollar when it comes to safety and ease of moving funds in and out. So this is not seen as a huge risk.
But what about all of the businesses that rely on imports for re-sale to the American consumer? These businesses will undoubtedly need to raise their prices, making non-US goods much more expensive for the consumer. This brings up the potential by-product of inflation.
According to Economics 101, the value of the dollar (or any other currency) is determined by supply and demand.
Today, world financial markets are overloaded with dollars due to the actions of the Federal Reserve. But lately, the central bank has been hinting about taking some of these dollars back, once it thinks that the economy is in recovery mode. Eventually, it will be forced to do just that, especially if the weak dollar leads to inflationary concerns.
Does this suggest that the battered buck is more likely to be stronger rather than weaker a year or two from now? Yes. As dollars become less plentiful, their value will rise as will foreign investor willingness to hold them. The threat of inflation will diminish as well.
Easy forex bottom line: Near-term expect the dollar to continue to suffer. The EURUSD looks headed towards breaking the critical 1.5000 level, and will encounter some selling pressure at 1.5010. Looking out one to two years, don’t rule out a sustained Dollar rebound.
EURUSD : Support 1 – 1.4920 Support 2-1.4850 Resistance 1- 1.5000 Resistance 2- 1.5010
10/20 Market Commentary
Like this:
Tags: 10/20 Market Commentary, dollar, Dollar Down, easy forex, EURUSD, THE ALMIGHTY DOLLAR
This entry was posted on November 29, 2009 at 2:09 pm and is filed under 1. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.