US Dollar at 7 Month High Versus Euro and 2 Year High Against Pound

The dollar has risen to its highest level in almost seven months against the Euro and the British Pound fell to a two year low against the greenback. The strength in the dollar has been driven by the plummeting price in oil (the dollar has moved in the opposite direction of oil), and the weakening of European countries.

The dollar has risen to its highest level in almost seven months against the Euro and the British Pound fell to a two year low against the greenback.  The strength in the dollar has been driven by the plummeting price in oil (the dollar has moved in the opposite direction of oil), and the weakening of European countries.

Several analysts came out in support of a stronger dollar over time.

"Since mid-July, the decline in the oil price and growing signs of deterioration in the European economy [and elsewhere outside the U.S.] were the major drivers for the decline," said strategists at KBC Markets in Brussels, referring in particular to the euro/dollar rate. "Since mid August, the [euro] correction shifted into a lower gear, but yesterday's price action indicates that the dollar is still in the driver's seat."

"With U.S. data generally holding firm or surprising to the upside of late, there seems little reason why the [dollar] should not grind out further gains," particularly if oil continues to fall, wrote Credit Suisse currency strategist Martin McMahon in a research note.

``The dollar is in an uptrend,'' said Meg Browne, vice president of foreign-exchange research at Brown Brothers Harriman & Co. in New York, in an interview on Bloomberg Radio. ``Growth and monetary-policy differentials are beginning to shift in favor of the U.S. dollar. The oil story certainly helps.''

Chuck Butler, President of Everbank World Markets and the creator of the Dollar Bull CD is actually quite bearish.  He writes in his newsletter The Daily Pfennig:

"You know... This latest move by the dollar has been driven by the 2nd QTR GDP print from last week... Recall that I called it for what it was, export driven... But the markets just don't get it... Exports were strong, because the dollar had finally reached a weakness that allowed it to be competitive! But that's all been wiped out, by the dollar rally... So... The markets that are so "smart", are just seeing this one fly right over their collective heads!

But, it looks as the market participants' "attitude" regarding the dollar have changed. And as I've told you before... These are all fiat currencies, so when the markets want to stray away from fundamentals, and change their attitude, there's nothing to stop them. But, this move has really gone too far too fast... Shoot Rudy, the euro saw a 6.4% decline VS the dollar in August, which happened to be the worst performance month on the euro's books. Even worse than when it was on the slippery slope from $117 to 82-cents in the 1999-2001 time period." 

I expect oil to fall below $100 and this should provide further impetus to a rising dollar.  It also seems that the US is now in the fourth or fifth inning of this recession/financial correction while Europe is just beginning to feel the pain.  If you subscribe to the first in, first out theory, then the US may be beginning to see the first glimmers of hope.  And if markets are really forward thinking, then the dollar may reflect the fact that better times are ahead.  Europe, on the other hand, may be just starting their round of pain.

But perhaps most convinving to me is the fact that a meal for two at McDonald's in Oslo costs over $70 because of the weak dollar.  That's not right and is a flag to me that the dollar has been unsustainably weak.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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