Despite the rebound of the EUR at the end of last week as a result of Mr. Trichet’s proposals (ECB statement, 15^th January) traders are not convinced that the EUR will strengthen against the dollar, as was the case last spring.

Admittedly, the European Central Bank is not yet ready to consider a 0% interest rate, which makes sense because it still has some flexibility even with a rate set at 2% . However, given the current economic situation in the euro zone, the ECB clearly must attempt to avoid a further decline in the months ahead. Realistically, Mr. Trichet has already warned that a further reduction of interest rates in the euro zone may be necessary in March and has hinted that the rate will remain stable until then.

The problem for the EUR is that economic prospects for the euro zone are increasingly bleak. Indeed, in the States the scenario is similar if not worse, as some economists fear a period of deflation, although Ben Bernanke rejected this assumption when he spoke at a seminar at the London School of Economics. However, unlike the EUR, the USD has status as a reference currency in international trade and, even if its general status is a bit low, in the absence of a viable alternative traders traditionally trust the dollar. The EUR is evidently not yet, at 10 years old, a viable alternative to the USD as the currency of reference.

With an economy in recession and with ‘the worst yet to come’ for the euro zone as was pointed out the recent OECD report, the EUR has barely surfaced on the forex over the last few weeks. The recovery at the end of last week is unlikely to be part of a substantial trend and long term traders are trading heavily on a further fall of the EUR against the USD.

Related posts:

1. So - does the EUR lack credibility? The tenth anniversary of the EUR passed by virtually unnoticed...
2. Traders expect volatile week ahead A number of events this week have the potential to...
3. Traders anticipate ECB announcement - looking for clues on rate policy (10:00 GMT) The Euro is steady for the last 24...
4. Dollar paring losses following Japan’s support in the U.S currency The U.S dollar is rising on Friday against the Euro...
5. EURUSD tops around 1.37, heading for a record weekly gain Now that we know how serious the market has taken...