Don’t Bet on Dollar’s Rise, Euro’s Fall

02/15/2010 1:00 pm EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of The Aden Forecast, say the dollar’s recent rise is a blip in a long-term decline, and the euro may be close to hitting a near-term bottom.

The US dollar moved higher this month, and the main reason was risk aversion. We’ve seen this happen before, most recently during the financial crisis of 2008.

We know it doesn’t make sense, but with all of its debt and deficits, the US is still considered a safe haven. That’s the way the markets see it, and we have to go with this reality.

The US dollar has been falling for nearly 40 years, but that doesn’t mean it’s been a nonstop drop. Like any market, there are times when the dollar rises, like in the late 1990s and again in 2005 and 2008.

Since 2000, however, these upward rebounds haven’t amounted to much. The [US Dollar index] was unable to break above the mega-trend average, now at 84, and that’ll probably be the case this time, too. If so, the dollar’s major trend will remain down and bearish, [so] the dollar will likely resume its downward path once the current rebound rise is over.

One factor that would push the dollar up is a change in the Federal Reserve’s policy. Higher US interest rates compared to the euro rate, for example, has tended to coincide with a stronger dollar. When the difference between these two interest rates was declining, the dollar has weakened.

Over the past year, the differential has been neutral, slightly favoring the euro, and the dollar has declined. But the Fed recently stated yet again that [it] would keep interest rates “exceptionally low” for an extended period. That in turn is going to keep downward pressure on the dollar, despite its recent bear market rebound.

Plus, various countries are becoming even more outspoken about putting an end to the US dollar’s global dominance. Most recently, French President Nicolas Sarkozy has been complaining [that] the dollar’s weakness is unacceptable. The world monetary system must become multi-monetary, he says, and a dollar-based system doesn’t make sense any more.

Meanwhile, the euro has been having its own problems. Even though Greece makes up [only] 2% of the European Union, its financial problems have weighed heavily on the euro, with Spain and Portugal following. Some sluggish economic signs also added to the downward pressure.

Note that the euro recently slipped below its moving average at 1.386. If it holds above or near it, the major trend will remain up and bullish, signaling the euro is headed higher once this correction is over. If the euro falls further, then its next important support would be at the up trend since 2002, currently at 1.31.

We don’t expect the euro will decline to that level. The euro’s (medium-term) leading indicator is now at a temporarily too low area, which means that this correction is nearing an end, [so] the euro is going higher following its current breather.

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