The Euro’s Resilience Is the Dollar’s Weakness

(This is an excerpt from an article I originally published on Seeking Alpha on October 24, 2013. Click here to read the entire piece.)

When I saw the Wednesday (October 23, 2013) headlines screaming that European Central Bank (ECB) President Mario Draghi indicated he had no hesitation about failing banks in upcoming, comprehensive stress tests, I assumed the euro (FXE) would tumble fast and hard. European stocks responded as expected, in fact the plunge in major indices was the largest since late August. However, the euro barely blinked.

{snip}

Next up was the eurozone’s PMI reading for services. The “expectation” was for a relatively healthy 52.2 but instead it came in at 50.9, scraping contraction levels. {snip}


A resilient euro has steadily climbed against the dollar since 2012 lows
A resilient euro has steadily climbed against the dollar since 2012 lows

{snip}


The euro responds very favorably to US-related news and is relatively reticent about euro data
The euro responds very favorably to US-related news and is relatively reticent about euro data

Finally, here is a chart of the iShares MSCI Spain Capped ETF (EWP) just to confirm that eurozone stocks were hit hard by the Draghi news. {snip}


EWP finally pulls back after an intensely strong seven week run-up
EWP finally pulls back after an intensely strong seven week run-up

{snip}

This resilience in the euro is the U.S. dollar’s weakness. {snip}


The U.S. dollar seems to be breaking down
The U.S. dollar seems to be breaking down

Source for charts: FreeStockCharts.com

The main culprit for U.S. dollar weakness appears to be cooling expectations over the Fed’s original plans to begin tapering by the end of this year. Given the fiscal fiddling and squabbling in the U.S. government, the Fed is not likely to even think about tapering again until sometime in early 2014, eons away for foreign exchange markets. {snip}


U.S. interest rates have stop soaring higher and appear to be stabilizing
U.S. interest rates have stop soaring higher and appear to be stabilizing

Source: St. Louis Federal Reserve

I still prefer to use the British pound (FXB) to bet against the U.S. dollar given I remain bullish on the UK economic recovery. I remain skeptical about the euro’s rise, and I figure the currency is much higher than desired by the ECB given the still fragile nature of the eurozone economy. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on October 24, 2013. Click here to read the entire piece.)

Full disclosure: net short euro, net long U.S. dollar

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