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Dollar trend reversal: Is it time to short the euro and go long the dollar?

Today's Financial News - Posted August 5, 2008

After the rout in oil, gold and commodities, the U.S. dollar may be in for a trend reversal. Is it may time to short the euro yet?

by J. Christoph Amberger

Baltimore — (TFN): The dollar rebounded to a seven-week high at $1.5454 per against the euro as the Fed kept interest rates unchanged. The dollar rallied against currencies like the Norwegian krone, the Canadian dollar, the yen.

The Canadian dollar hit C$1.0453 against the greenback, the lowest since Sept. 11, 2007 — as crude oil fell below $119 a barrel for the first time since May. Gold plummeted past $900 per ounce. And just last week, Ottawa announced that the monthly GDP had contracted again, for the third of four months.

The currency wonks are going all out with their predictions that “the dollar may strengthen beyond $1.53 per euro this week”.

Now, that’s just crazy talk.

There’s still enough energy-related inflation in the system for Federal Reserve Bank of Philadelphia President Charles Plosser to hint that interest rates could increase “sooner rather than later”.

And while gold bugs have been singing the praises of non-U.S. assets, currencies, economies, maybe Canada’s recessive GDP performance is a welcome reminder that debt, economic weakness, over-reliance on single economic sectors is not an American characteristic. Even Australia is at the verge of a horrendous banking and real estate crisis — which will take a bite out of the Australian dollar and the carry trade.

Watching the undignified stampede out of oil, gold, and potash over the past days, the retreat might turn into a rout for the hedge currencies as well. We’ve seen the Hard Money Boys’ pet assets getting pummeled by 10-30% in less than two months. If the euro merely follows gold’s 10% drop, we could be looking at $1.45 before we send the kids back to school.

And I have a feeling that the European export industries wouldn’t mind one bit…

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Posted by J. Christoph Amberger · Filed Under International Investing 

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