Monday, May 16, 2011

4 Reasons the dollar's decline will continue ---Bu Shan Saeed


The largest tailwind for the commodity bull market is set to continue. I think the Euro is headed back to 1.55 EUR/USD by year end 2011:

When the dam breaks you get washed out. Taking out position concentrations is a favorite sport in a range trading environment and the world is certainly heavily USD short. As the Fed stays on hold more than is currently expected, EUR/USD is likely to once again overshoot and head for 1.55, the top of our now higher EUR/USD forecasts.

If I analyze the current dip in EUR/USD as a buying opportunity as the Fed is likely to remain tight, QE2 has failed, the German economy strengthens and the European sovereign debt crisis doesn’t cause any significant economic disruption. EUR/USD is likely to once again overshoot and head for 1.55. Current dip is providing buying opportunities for the EUR against USD as:

Four solid reason for Dollar's decline

1. The Fed stays on hold more than is currently expected. Fed is doing more harm than good. Federal Reserve officials harbor noble intentions behind loose monetary policies, yet the downsides to low interest rates coupled with quantitative easing are starting to outweigh the positives. The Federal Reserve is scheduled to end a $600 billion bond buyback in June. The buyback, known as quantitative easing, is designed to pump banks full of money so they'll lend and also invest in the stock market.

Ideally, higher stock prices should prompt companies to sell fresh stocks and use the raised capital in job-creating new projects, although inflation often results with quantitative easing.

While I can understand and sympathize with the chairman and with the Fed, I think there comes a time where the Fed has to say 'We've done everything we could. I'd rather have them jumpstart the economy than be actually providing the fuel or the gasoline for the economy.

2. QE2 has failed miserably....I could see after with interest rates at zero where FED had to come up with some innovative techniques to try to jump-start the economy, but I think that the benefits have finally started to be outweighed by the negatives, whether it's the dollar or commodity prices or whatever you want to look at. With all that money flowing into the banking sector via quantitative easing — known by its abbreviation as QE2 — the dollar continues to weaken [ lost 51% of its value in the last 27 years against major currencies], which has helped fuel demand for commodities, including oil. Unforeseen political turmoil across the globe isn't helping things either.

3. German economy is booming despite the level of the euro...Germany is leading from the front to keep the euro-zone alive and kicking....Trained and productivity labor force, strong exports and strong leadership are helping the cause in this effort.

4. Euro’s fate will depend on how the ECB reacts to developments in the center vs periphery. Assuming peripheral risks stay constant this is bull euro.

Forecasts: EUR/USD would be at 1.52 by year end [from 1.40 at present]

Main near-term threat:

Uncertainties over ECB’s near-term policy tightening and Greek debt fears haunt the euro. Violent short-term moves in EUR-USD [in one direction or the other] cannot be ruled out.

European currencies:

No reason to own the euro relative to the Norwegian and Swedish krone. EUR/GBP profile does suggest you can only be a GBP bear for a little longer.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to kindly execute their own due diligence before signing or entering into any financial contact or strategic investment. All financial transactions carry a RISK.

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