By Brad Peterson
It was about 2 years ago that I heard an analysis of the EUR/USD and the probability of the pair going to 1.70. Back then the exchange rate was between 1.20 and 1.25. In other words, to buy 1 Euro one would have to pay $1.25 USD. There were some strong technical indicators implying Euro would continue to strengthen. With the current price today nearing 1.60 this analysis has proven to be quite effective.
One has to wonder when the Euro will run out of steam. January of 2009 will mark the 10-year anniversary and it has done quite well in it’s short period of existence. Consider the fact the Euro was at one time as cheap as $.80 USD…today you’ll pay twice as much! Maybe postpone those trips to Europe for the time being and look for those warm destinations in Brazil or Mexico.
Countries throughout the world are jumping on the bandwagon of a strong Euro. Billboards from banks advise depositors to convert their U.S. dollars to Euro’s. One of the world’s foremost investors Warren Buffet has been bearish on the U.S. dollar for years now. The question has to be, are things really that bad? Or, are things really that better in other parts of the world, specifically Europe? We need to keep in mind some of the biggest investors in America are overseas. Take a look at some of the top shareholders of major U.S. companies. Government debt has been financed by foreign countries for years. If the U.S. dollar continues it’s demise it will effect the world as a whole, just just the USA.
The Euro is long overdue for a cooling off session. However, don’t expect a turnaround to be as simple as stopping a sports car on a dime. Visualize an aircraft carrier or cruise ship turning around, it takes time. What’s interesting to note is the USD has strengthened already against other currencies. The GBP/USD hit a peak just over 2.11 back in November 2007 and hasn’t been there since. The same is true with the USD/CAD when the USD weakened to almost .90. Ever since breaking a key psychological barrier of 1.30 the Euro has never looked back. The closer we get to 1.70 the stronger resistance and probability of a turnaround.
In the meantime I’ll continue to watch the EUR/USD and look for opportune entries as it continues to climb. Keep in mind there are two sides of this equation and not much talk has been considered of what is taking place in Europe. Watching key technical levels combined with fundamental analysis from both parts of the world can help lead to a strong USD rally for a period of time.
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