Euro is headed for biggest weekly gain against dollar

Fri, Dec 19, 2008

we didn’t have much time to digest the fact EUR/USD was trading above 1.3 at the beginning of this week, before the pair rocketed even higher above 1.4 inÂ almost no time.

On one side we have the Federal reserve cuttingÂ target rates on the dollar to a near zero level, and on the other we have the European Central Bank that is at this moment, reluctant to go as low as the Americans did regarding interest rates, even if one is looking at the long term prospect.

What we get is the Euro strengthening against most major pairs and particularly against the dollar. However this is clearly not a story of a strong Euro, but rather a story of a weak dollar- actually a very sudden and exaggerated weakness in the dollar.

The reason everyone was running towards the dollar in the first place was the realization that the global economy is deep in the hole, and since theÂ whole mess has started in U.S and only laterÂ spread over to the rest of the world, then when the recovery will come, US will be the first one to enjoy it, while other countries are still struggling with shrinking economies.

This assumption is still correct, however it is diverted from the minds ofÂ investors at this moment as a result of recent developments in interest rate and the prospect the FED will resort to Quantitative Easing.

At this moment it is possible the dollar will stay on the strong side for for a while, however, when bad news from Europe will once more grab the center of attention and jog everyone’s memory the situation is bad everywhere and not just in US, investor might once more find the Euro unjustifiably high.