Forex Trading - Global Foreign Exchange Markets

The Euro showed unrestrained relentlessness against the USD last week, reaching a peak of 1.5238 before retreating back below 1.52.

Negative Dollar sentiment is at extremes not ever seen before. Gold is making new highs by the day as the dollar makes new lows. The ECB has not expressed any major concern for the extreme flinging of the EUR/USD as it moved 5 cents in one week. European businesses are watching the exchange rates nervously as they move with volatility potentially increasing business cost and reducing demand from overseas with ease. Inflation continues to be a major concern for the ECB, while The Federal Reserve continues to promise rate cuts and ignore inflationary pressures in the US, as they continue to say that “inflation expectations remain contained.”

It must be wonderous living on fantasy island.

Despite what looks to be the obvious sure bet, you have to ask yourself if the ECB will even allow the EUR/USD rate to continue to push its bounds so violently? While the Euro is only showing a modest strength, the USD weakness plays the largest factor in the relentless rise of the EUR/USD. Even with a strong Euro working to the ECB’s advantage on the inflation front, if the price continues to rise relentlessly there has to be a breaking point, the only question is at what price does that occur?

Looking long term we can argue over where the EUR/USD is going price wise, however for the short term, possibly even a medium term outlook, something is amiss here. The dollar devaluation has been sharp and it has pushed the Euro very roughly against barriers that were hard to imagine a few years ago. I can recall the ECB being nervous about the EUR/USD swimming around 1.34 two years ago, yet here we are sitting above 1.50, with no meaningful rhetoric coming from the ECB?

Behind closed doors around the world there are alarmed central bankers that are meeting in private and discussing intervention against Dollar weakness. They need some sort of intervention to protect their countries from the dramatic risk of an uncontrolled drop in the Dollar. The Fed should be discussing these same things along with the Bush Administration as they wave “strong dollar policy” on one hand and rip the value out from under it with the other hand. The worlds central bankers are going to be more defensive about this intentional dollar devaluation and you can expect there will be some temporary dramatic action.

Am I predicting the future? Not really. I am suggesting that all is not as it seems. It would be prudent to exercise some caution before jumping on the one way train and if you do jump on that train, make sure you set the brakes in case of a surprise.

In the currency markets, what goes up, must come down, harder than it went up. There is no accurate way to track where the jump off point will be in the EUR/USD, but you can bet that we are getting close to that point. Whatever your long term view would be on the rise of the EUR/USD, it would be wise to exercise extreme caution at this point.