A Likely Road Map for the Greenback
By Bob Wong, Vice President
25 year Monthly EUR/USD Chart
In the early 80’s the Reagan tax cuts expanded the U.S. economy, which led to a very strong US dollar. A stubborn U.S. trade deficit however prompted the engineering of the Plaza Accord that massively devalued the greenback, after the synthetic EUR/USD hit a low of 0.6425 in early 1985. It’s hard to imagine any central bank or government action could have that kind of impact on the US currency today. In three successive waves the synthetic EUR/USD rallied to 1.4575 by 1992.
The prolonged economic expansion from 1992 to 2000 under Clinton propelled the US currency higher driving the EUR/USD to a low of 0.8200 by September 2000. Since that time, the US dollar has been in a death spiral exacerbated by negative sentiment towards the U.S., weak economic performance and continuing Federal Reserve policy favoring low U.S. interest rates.
This month, on March 16, 2008, the EUR/USD traded above 1.59 for the first time.
The monthly EUR/USD chart suggests the following scenarios are possible:
1. The US dollar will continue to decrease between now and the U.S. election in November 2008. The upper resistance of the trend channel (T2) suggests that this top for EUR/USD may come in anywhere between 1.63 and 1.65 by November 2008.
2. The mid-point of the potential top in the EUR/USD is 1.64 which coincidentally will be 100 big figures, or 10,000 pips, above its synthetic low of 0.6425 prior to the Plaza Accord.
3. If the above scenario does come to fruition, our mid-range target of 1.64 would also represent a two-fold increase in the value of the EUR/USD from its low of 0.8200.
Obviously this is not a prediction but simply one man’s musings about a long term chart in the currency markets. Many traders have wondered when the decline in the greenback will come to an end and our conclusion is that no one really knows, but technical, fundamental and political analysis will improve our overall understanding of where things may be headed. In addition to the technical picture highlighted here, the economic outlook for the U.S. also suggests that there will be no marked improvement until 2009. If we couple that with a strong likelihood that the Democratic Party will win back the White House in November while keeping control of the House and Senate, politically this could foster a change in sentiment towards the U.S. and sparking a sustained recovery in the US dollar.
If you would like to learn more about trading foreign currencies please contact Bob Wong at 905 -771-5854.
The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Please carefully consider your financial condition prior to making any investments.
