Question: Is the dollar going to show any gains against the euro or pound within the next month?
David from Charlesville Answer:
David, your question represents more than a few questions I have received asking me to “predict” future currency movement (one even asked for the next hour). As I have stated, it is not my intention to offer market predictions in this column, so let my answer to your question act as an answer to all those who have asked me for predictions on currency movements.
Professional traders and sophisticated software can forecast a potential “future” for currencies. Some rely on technical analysis to accomplish this, while others look to economic and monetary fundamentals. Both approaches have equal merit in my book, but, for my approach to analyzing currency markets, I prefer looking to the economic and monetary fundamentals.
My approach to analyzing currency markets looks more broadly at specific economic and monetary elements that influence currency markets. Thus, based on current economic and monetary factors in both Europe and the Unites States, I would argue the dollar will continue showing weakness against the euro and pound for at least the next quarter or until the U.S. economy begins actually growing again. When the U.S. economy does begin its resurgence, investors will come back to the dollar strongly, at least until the recent “recession breaking” monetary policies of the U.S. turn into an inflationary force driving investors away. Keep in mind, Europe has utilized almost the same monetary fixes to its economies as well, which raises the ugly possibility of near-future global inflation on a grand scale. What this means to the mentioned currencies is truly unknown.
The current global economic situation is extremely complex, and many factors other than the ones mentioned affect the euro, the pound, and the dollar. One factor to watch closely is the relationship between the movement in the price of oil, the level of the DJIA, and the rise or fall of the dollar. Currently, it appears that the dollar has an inverse relationship to both the price of oil and DJIA. It appears to me that the current strategy is to “sell the currency and buy the stock.” If this strategy holds, look for continued weakness in the dollar in the short term.
Trade in the day; invest in your life …
