Will the future be inflationary or deflationary?
Whatever it turns out to be will have great consequences for the financial markets. Inflation and deflation are like day and night. As a rule of thumb: inflation means higher long-term interest rates, deflation lower. Inflation is not unfavorable for asset prices such as stocks, while deflation means profits drop and a rapid decrease in demand, leading for example to lower stock prices. Real estate loves inflation, but hates deflation. The picture for exchange rates is even blurrier, as there also the relative performance of various countries and regions is very important. Not all currencies can become weaker at the same time. Therefore, higher inflation in the US than in the euro area, for example, would send the EUR/USD exchange rate to new heights, everything else remaining equal.So, what will it be?
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Monday, February 14, 2011
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.
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.
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