Monday August 22, 2005 - 12:11:58 GMT
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Black Swan Capital - www.blackswantrading.com
Are euro rationales solid?
“The real problem is the US economy is just too leveraged. Starting with the housing industry, the country is too dependent on derivatives markets to create the illusion that interest rate risk can be conjured away.”
The technical damage to the euro last week appeared to signal the end of dollar “correction,” setting the stage for a dollar move to new highs later in the year.
The rationale for euro bulls seems twofold:
1) Surprising euro-zone economic strength
2) Dollar yield appear discounted in the market
Euro-bulls are adamant over their belief that dollar yield appeal has been discounted by the market. Yet, they don’t seem to be concerned in the least that euro-zone growth prospects might be equally discounted.
We have also witnessed more and more commentators warming again to the current account and US budget deficit rationales. The current account canard is no doubt the all-weather excuse to pin to a falling dollar. After all, the dollar must depreciate in order for the current account to improve is the mantra. Well, no it doesn’t. But that’s not the point. The point is that the same people that assume the dollar must fall, and the euro rise, because of the current account, seem to conveniently overlook the possibility that euro-zone growth is quite dependent on exports to the US and helped in part by a relative decline in the value of the euro against the dollar.
Is the dollar “correction” over? We think so. But maybe we see a sideways affair for a bit. We still believe: yield, growth, and net capital flow push the dollar to new highs against the euro this year.
Black Swan Capital
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