Dollar vs Euro

A cura di Walter Snyder, Swiss Financial Consulting

US dollar weakness at the end of 2017 and the start of 2018 has made it clear that traders are going to have to be careful with dollar futures. On Friday, 12th January 2018, the euro was trading at 1.2202 against the US dollar with an increase of 1.41% for the day (+0.0170). That the dollar is weakening seems odd as the Fed has clearly given forward guidance for three more interest rate increases in 2018. Given that, one would expect a stronger dollar especially as QT (Quantitative Tightening) has only begun.

One possible explanation for euro strength is that the German economy has recently been registering very positive advances with unemployment extremely low, even for German conditions. The effects of Brexit on the euro have apparently already been discounted by traders.

The price of gold has increased concurrently with the strengthening of the euro, and the yellow metal is now purchasable at $1,338.30. The rise in the gold price can be considered to be symptomatic of dollar weakness and not a cause.

It is much more logical to attribute dollar weakness to the prospects of increasing federal debt due to the newly approved tax law. With the current rally near the end of its cycle, a recession is extremely likely in 2018 while the equity market is rather expensive. It will be expensive to service the debt, especially in a recession.

The price of crude oil has surged to almost $65 a barrel ($64.40), and that will help contribute towards spurring inflation in the US and the EU. This is the case even if the US is now close to becoming the largest global oil producer.

There is yet another factor that should be taken into account. The Chinese oil futures market in Shanghai will start towards the end of this week. The Chinese crude oil market accounts for about 20% of the total. The performance of this market should be watched closely as it represents a frontal attack on the petrodollar since contracts will be in gold-backed yuan and not dollars.

Another point is the one trillion dollar US “defense” budget that has been approved by President Trump. Besides helping to increase the deficit, defense spending also means spending lots of dollars outside the US. It constitutes a dollar drain.

From the various aspects of the relation between the dollar and the euro expounded above, it should be clear that there are numerous factors that influence the value of the world’s major reserve currency. Traders seem to doubt that the US economy can compensate for all the negative tendencies dragging down the dollar.

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