US Dollar Is To Gain Strength (EURUSD)

Compared to the Euro the US dollar should be stronger if you just compare prices of goods on both sides of the Atlantic. Things in Europe cost between 20% and 25% more than in the US. From cars to iPods, from BBQs to netbooks and cameras. Everything.

However, the majority of the analysts support the view that the future of the dollar is to be weaker. Trade deficits and now the unprecedented growth of sovereign debt in the US, all indicate that the dollar should be lower. Recent events in Greece and concerns about future problems in other European countries (the unfairly called PIGS: Portugal, Ireland, Greece and Spain) are keeping the dollar stronger only for now, these analysts say. Also the fact that the economy is improving in the US more than in Europe is seen as a temporary positive factor for the dollar. However, when you have positive news about major core economies, it’s not unusual to see a positive trend in commodity and emerging-market currencies.

In Europe the situation about sovereign debt is difficult and is complicated by the fact of having economies of different strength under the same currency. Political factors are also very important in a Eurozone where a common policy is very hard to agree as we have seen for Greece. I think that Europe is more vulnerable than the US and sovereign issues should prevail to influence the exchange rate in favor of the dollar. Very hard to predict though.

Lately we have seen equities go up and the dollar remain stronger. Unusual because in the past years strong equities have been associated with a weak dollar. It means that European issues have had a role. I believe that when the stock market finally develops a longer correction, we will see the dollar appreciate vs the Euro.

Technically the dollar after printing a low at 1.3266 on 25 March has developed a rebound at 1.359. Now we should see at least a retest of 1.33. There is a positive divergence of indicators in the daily time frame. If the breakout is succesful we should see prices go below 1.30 with the next down leg.