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#1 12-01-2021 11:23:40

johnedward
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From: Paris - France
Registered: 21-12-2009
Posts: 3069
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EUR/USD: a case for a stronger dollar?

EUR/USD: a case for a stronger dollar?


One of the most striking news made headlines at the end of last week: all investment firms worldwide are forecasting a weaker dollar this year. No firm disagrees, making it a dangerous positioning as the market generally dislikes consensus.

The arguments in favour of a weaker dollar seem very convincing. There are millions of reasons to sell the dollar, from the Fed's printing of currency to the stimulus cheques sent to American households.

However, it should not be forgotten that the dollar remains the mainstay of the current financial system. Is it possible that the global reserve currency will strengthen, despite these calls for a decline?

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The ISM refers to a stronger dollar

If history has taught us anything, it is that the dollar could strengthen. We have seen the ISM manufacturing and non-manufacturing reports very strong compared to similar reports in other parts of the world. For example, consumer confidence indices in Europe are struggling to hold at the 50 level or are well below that, in the United States, the manufacturing consumer confidence index is above 60 and the services consumer confidence index is around 58.

On three of the last five occasions when the manufacturing ISM reached 60 or above, the dollar strengthened over the next 100 days. Could this be the beginning of a rising trend in the dollar?

In general, a currency reflects the strength of its economy. A normal reaction is to fall on negative economic data and strengthen positive data. However, the dollar is not just any currency, but the world's reserve currency. This means that most of the world's debt is issued in dollars, so the volatility of the dollar does not depend solely on economic data.

So far, the dollar and the financial markets have moved in tandem - higher equities and a lower dollar. This has created a so-called "risk-on" environment where the correlation between financial assets reaches extreme levels. This is a dangerous trading environment because it leads to over-trading, as traders do not identify correlated assets. In the currency market, the purchase of AUD/USD and EUR/USD was the same trade, as the correlation between the two increased significantly. In other words, all that mattered was the dollar, not the euro or the AUD.

In the future, two scenarios can lead to a rise in the dollar. The first is that the risk-on environment turns into a risk-off environment. The other is that the dollar reflects the strength of the economy.

Of the two, the first scenario seems more attractive, given the economic weakness created by the virus situation.

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"Anything worth having is worth going for - all the way." - J.R. Ewing

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