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The tide may have turned for the euro, as the recent green shots prompted currency traders to shed the dollar’s safety for the yield of more risky assets. 

After more than six months of heavy selling, the single currency managed to retrace almost 38.2% of the strong downtrend that started with the credit crisis, in July 2008. TheLFB-Forex.com Trade Team notes that most of the upward pressure came during the last nine weeks of trading, mirroring the rally seen in the equity markets, as institutional traders tried to diversify their holdings to other classes of assets including denominations in foreign currencies. 

However, these days, the euro might see even more support coming, as a number of traders build dollar-short portfolios, as the global economy recovers from what appears to be the worst recession since the 1930’s. A number of prominent financial ‘guru’s’ have come out in favor of the euro against the dollar.

These claims are in-line with what TheLFB-Forex.com Trade Team have said over the last few weeks. The dollar’s outlook is starting to appear grim once again, and once the global economy recovers, the major central banks will have to tackle inflation once again. To some this may appear as distant, but the market is already pricing in such a scenario.

Most likely, inflationist pressure will come from the crude oil market, where oil may surge once the global economy is on its way to recovery. This in turn will be reflected in the CPI, but unlike the summer of 2008, central banks are now targeting an expansionary policy, which should add some further points to the CPI data. One must think that right now some central banks are way off from their inflation forecasts made earlier this year. If this holds true, the euro may continue its rally as the ECB returns to its inflation targeting rhetoric.