The buck continued its ongoing descent on Tuesday despite various dollar-positive factors. Among what should have been dollar-positive events was most notably the unexpected contraction in UK GDP during the fourth quarter of 2010 which left the pound in tatters against the buck. Elsewhere, weaker equities and commodities should have improved the standing of the greenback however, these factors were unable to affect the relentless march higher of the euro.
While an improving economic picture and healthy demand for the EFSF bond yesterday should provide an underlying bid tone for the euro. We will feel that the euro-region is in a quagmire of debt and unemployment, problems that can’t be easily resolved. It is our belief that the euro is seriously over-valued at these levels however, it seems all but determined that the euro will test 1.4000 before retracing lower.
As such, while the fall of the dollar (and climb of the euro) is slowing it is entirely possible that we will still test 2010 lows posted in November below 76.00 before reversing higher. The recent drop of the buck hasn’t altered of 2011 outlook for the greenback which remains very bullish based on improving US fundamentals versus those of its counterparts, most pointedly Japan and the Euro-zone.