Thoughts from the Forex Trenches
15 Years ago | September 01, 2014 6/6/23, 12:00 AM
In the September Issue
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Is it EUR Weakness or USD Strength?
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Forex Trading Outlook for September (video update)
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New! Choose a Quality Forex Broker
Is it EUR Weakness or USD Strength?
The reasons for EUR weakness are fairly obvious, an underperforming economy, diverging monetary policy outlook, Ukraine + the impact of Russian sanctions on the EZ economy as this geopolitical risk has not gone away, negative interest rates, risk of more measures such as quantitative easing and the ECB (i.e. Draghi) talking down the EUR. This has put the EUR at the top of the funding currency list and helped pressure it down against all major currencies. I have been noting for some time that a weaker EUR was the logical policy option for the ECB and my only question is why it took so long for the central bank to recognize it.
With that said, what is not clear is how much of EUR weakness is due to a shifting tide in favor of the dollar. This is important as there is potential for the dollar going into a longer-term bull trend despite a weak president, dysfunctional Congress, lack of an energy policy and a tax code that is encouraging U.S. firms to move headquarters abroad to name a few.
The wild card would seem to be the growing trend towards U.S. energy independence and self-sufficiency that should shrink the trade deficit and reduce the supply of dollars abroad. The forex market is so used to the slosh of dollar liquidity, build-up of USD reserves in China, etc. from currency intervention and subsequent diversification that it is not looking ahead to what could be a new normal. This would have implications for the EUR as it is has been the main beneficiary of dollar reserve diversification, which is not ever going away but would have a negative impact on the common currency if the amount of dollars to be diversified was reduced.
This is for a future discussion but keep it in mind as energy independence has potential to make the dollar a strong currency, especially if a dysfunctional US government ever gets its act together and passes meaningful policy reforms. In the meantime, keep an eye on US interest rates as the uncertainty is when, not if the rate hike cycle begins while the ECB ponders a move in the opposite direction in a debate whether to undertake QE.
See my video outlook for the month ahead in the second part of this newsletter.
Jay Meisler, founder
Global Traders Association
Forex Trading Outlook for September (video update)
New! Choose a Quality Forex Broker
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