Wednesday, February 2, 2011

EUR/USD - Egypt effect likely short-lived

As long as the turmoil in the Mid East stays within bounds, many economists believe that additional dollar weakness is “inevitable”. Mostly on economic grounds. This implies that EUR/USD will keep rising, especially in hopes of a good plan to support the weak euro countries. In addition, the ECB seems more inclined than the Fed to hike its benchmark rate.
Over the coming months to quarters initially we expect EUR/USD to drop toward 1.20. Also because we think that the US economy will continue to improve in the coming period, hand in hand with rising US long-term interest rates (which is good news for the dollar).
Yet higher interest rates could hit stock prices hard (within a few months is our best guess). Owing to an appreciating dollar and falling asset prices we expect many carry trades to unwind. This will boost the demand for dollars. EUR/USD may form a top around 1.38 – or maximally 1.42 – in the near term.

Although many economists expect the EUR/USD to rise further, we believe a drop is immenent. See our reasoning by signing up for a free trial and reading our full report. You can sign up for a free trial here.