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USD and the Greek Debt Crisis - by Chris Brueck

Discussion in 'Forex Daily News & Outlook' started by GCAM, Feb 24, 2010.

  1. GCAM

    GCAM New Member

    Sep 25, 2009
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    Asset Manager
    February 24, 2010
    by Chris Brueck of Gold Coast Asset Management Inc.

    I believe that the US Dollar will see further support through out 2010. Federal Reserve Chairman Ben Bernanke said that the central bank will keep interest rates low to ensure the economic recovery. But although the economic rebound currently requires low interest rates, policy makers will need to tighten monetary policy at some point! This already occurred with the Fed's recent quarter-point hike to 0.75%.

    For the currency trader, the question is whether the Fed will continue to raise their rates before other central banks around the world. Although Bernanke states that interest rates will need to remain low for an "extended period", I believe that the Fed will raise its rates before before other countries, thereby decreasing the rate differential between the US Dollar and higher yielding currencies. So, it is simply a matter of "when".

    Since inflation is "likely to remain subdued", I don't see any extraordinary demand for the US Dollar. However, currency values do not exist in a vacuum and are relative to the economic health and monetary outlook of other countries. Hence the name "foreign exchange". So, to further evaluate our outlook for the US Dollar, it is important for us to look at the economic conditions of other countries. The key topic I am watching is the Greek Debt Crisis in the Euro Zone.

    Demand for the Euro has dropped mostly due to concerns that Greece will default on its debt. Jean-Claude Trichet, President of the European Central Bank, is placing enormous pressure on Greece to pop its ballooning 12.7% deficit down to 3% levels by 2012. The Euro Zone prefers a devalued Euro, as that positively impacts the amount of goods and services that they export. However, they do not like a devalued Euro when its economy is ridden with debt. If Greece's deficit continues to balloon, the European Union may have no choice but to drop them from membership and remove them from the Euro Zone to readopt the Drachma.

    Now, we need to take caution here in our forecasts for the Euro and the US Dollar. If Greece loses its membership from the European Union and Euro Zone, currency traders need to position themselves for the potential that international banks and trading institutions may regain their confidence in the Euro Zone. That could prove to be bullish for the Euro and bearish for the US Dollar. However, banks and institutions could also view such an event as further deteriorating the economic health of Europe in general. In such as case, that could prove to be bearish for the Euro and bullish for the US Dollar.

    I have a strong feeling that Greece will ultimately default on its debt and lose it EU and EZ membership sometime in the next 12-16 months. However, for now, my outlook for 2010 is that the US Dollar will continue to gain a bit more strength against the Euro, even in light of Bernanke's statements that interest rates should remain low for a while. However, without more demand for the US Dollar, I foresee it ranging between 1.2800 and 1.4500 against the Euro.

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