STRATEGY
FX
WHICH
DIRECTION FOR THE EUR/USD?
the recovery may remain unusually slow for a sustained period. However, it seems that the problems within the European Union have the potential to dwarf those of the United States, even while concerns over the budget deficit and debt ceiling continue to intensify.
T
hough it may be too early to call the recent dollar strength a rally, we see this as a correction that will lead into a much desired and long awaited rally that may see the
EUR/USD down to the 1.35 figure over the next three months and the 1.20 level over the course of the next twelve months.
We’re not the only ones that have been wondering if the turn in the dollar is going to last. Why should it? Tere’s nothing fundamentally positive about the economic recovery; instead, the recovery has been sluggish and very inconsistent throughout the last several years and even Federal Reserve officials have publicly said that
The issues surrounding Greek debt are only the tip of the iceberg as other EuroZone members including Portugal and Ireland are also having a difficult time with austerity measures to rein in budget deficits. Fundamentally, a default or restructuring of any sovereign nation debt will be a bad thing, not only for the corresponding nation, but for the entire global financial system. Such a credit event will without a doubt lead to an increase in the default risk premium for other member states, requiring a higher yield from private investors. Countries such as Ireland and Portugal may require further financing from the ECB if they’re unable to afford selling debt in the public market at much higher interest rates. With all the bailouts the ECB is involved in already, it puts itself at risk for major losses.
As investors’ concerns continue to grow about the
health of the global economy, where will money go during such uncertainty? The U.S. dollar has been the worst performing currency during the first 6 months
FX TRADER MAGAZINE July - September 2011 45
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