EUR/USD is headed higher, said Douglas Borthwick, head of trading at Faros Trading, a foreign exchange advisory and execution firm.
While many on Wall Street are quite pessimistic about the prospects of the euro currency, Borthwick thinks there are fundamental reasons to believe the dollar will devalue even faster.
Below are the five points of his long-euro/short-dollar thesis.
1. The US is in a weaker fiscal shape than Europe.
2. There is still plenty of ‘flight to quality’ remaining in the dollar.
3. The value of the euro is being talked down by officials from core Europe.
4. There is more to the story of Latin American/Asian central banks buying the dollar to devalue their currencies.
5. The natural course of action for the US to take is to devalue the dollar.
Clicker on “Start” to view the explanations for these five theses.
Faros Trading basically agrees with Fitch Ratings, which said in late January that the US will have the “worst” fiscal metrics of any ‘AAA’-rated countries.A major reason was President Obama’s tax compromise. Moreover, the US has no "credible medium-term fiscal consolidation strategy.”On the monetary side, the Federal Reserve’s program of quantitative easing may undermine confidence in the US dollar and raise inflation expectations, according to Fitch.
ReutersWhenever global investors are scared, they buy into the US dollar in a ‘flight to quality’ move.The global financial crisis and the European debt crisis are recent events that have scared investors to move into the US dollar.Currently, a significant 'flight to quality’ still remains in the dollar, said Borthwick.Therefore, as fear subsides and the global economy normalizes, investors – no longer so fearful – will take their money out of the dollar.
Reuters PhotoBorthwick thinks European officials have been “talking down” the EUR/USD by pointing to the problems in peripheral European nations.A main motive is that as the euro slides against the dollar, exports in core European countries like Germany and France become more competitive relative to American goods.Indeed, exports greatly boosted Germany’s economic growth in 2010.From this perspective, the euro has been kept artificially low and its fair value should thus be higher against the dollar.
ReutersDollar bulls argue that Asian central banks will keep on buying the US dollar in order to keep their currencies undervalued.What they don’t realize, according to Borthwick, is that after Asian central banks buy the US dollar, they then exchange the dollars for other reserve currencies like the euro, the pound sterling, or the yen.Some of these Latin American/Asian central banks first buy the dollar only because the liquidity is thin for directly buying non-dollar currencies like the pound sterling, euro, or the yen.
REUTERS
