The Euro and the US dollar have been engaged in a dance where one takes turns leading or rallying and the other swoons. Until they reverse roles and the dance starts all over again. The last time I wrote about this waltz was at the end of September 2010: Euro Euphoria.
Back then, the Euro index had rallied almost non-stop from the summer to reach north of 135. The US Dollar index, true to its mirror relationship, had been falling since the summer of 2010 and was almost at 79. As you would imagine, the sentiment for the two currencies was quite lopsided. Euphoria for the Euro and abysmal pessimism for the dollar.
As usual, I was a bit early but eventually the extreme sentiment did assert its influence as the Euro topped out and started to fall.
And the US dollar index slowly found its footing and started to rally. Which brings us to today. Once again, the sentiment for these two currencies is quite lopsided: the Euro is once again enjoying a euphoric outlook for sentiment surveys while the US dollar is scraping the bottom of the chart and sentiment indexes like the Daily Sentiment Index fall to single digits.
The US economy is enjoying a surprising amount of strength going by several economic indicators. For example, the initial jobless claims fell to their lowest levels since 2008, US unemployment aid requests fell close to a 3 year low and according to data from the ISM, US manufacturing expanded the most since 2004. But all it took for even more pain for the beleaguered greenback was for European Central Bank president Jean-Claude Trichet to muse that it is possible that the ECB would raise rates by 25 basis points next month.
The forex market seems to have developed amnesia when it comes to the messy economies within the European union. Greece is a complete mess. Ireland has just elected a belligerent government for one reason and one reason only, to re-negotiate the stiff austerity measures instituted by the IMF/EU to get their fiscal house in order.
And Portugal is in dire need of an infusion but is stubbornly refusing to seek help – until it might be too late! Here’s a short video from FT.com about the situation in Portugal.
Once again, I’m probably going to be too early but looking at the lopsided sentiment, I think that we are about to see another inflection point with the currencies again switching roles. The US dollar will head back up and the Euro, back down. Perhaps it will take a little bit of time for traders to realize that the European house is in much more disarray than the US one. Or maybe there will be some big headlines that will grab everyone’s short attention spans as Portugal finally gives in and accepts a huge rescue package.