A slowdown in Europe while the US Dollar strengthens!.jpg

A slowdown in Europe while the US Dollar strengthens!


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David is a Director of Halo Financial Ltd, a company which provides money saving foreign exchange facilities for migrants, international property investors and companies involved in international trade.

YOU MAY find it perverse but periods of stability in foreign exchange markets are always nervous times for traders. It’s just not their natural environment. It is odd for a market that turns over 1.6 trillion US Dollars a day to trade with too much consensus.

In fact, if everyone agreed on the likely path for exchange rates, no one would ever find a buyer for the currency they wanted to sell. As the old adage goes, in financial markets, when one trader buys another sells and they both think they are being astute.

However, we are back into more normal volatility since, after a lengthy period of relative stability, a fall in oil prices coincided with a dire warning of recession from the Bank of England, an upturn in US economic data and the Eurozone announcing its first quarter of economic contraction since the Euro’s inception.

The most dramatic effect of all these stories was the sudden rush of funds from the Euro and Sterling into the US Dollar. Such was the pace and magnitude of the move that from July 28 to August 14, Sterling lost 15 cents against the US Dollar and the Euro lost 10 cents. It doesn’t take a mathematician to see that the Sterling – Euro exchange rate would have fallen with the Euro relatively stronger than the Pound even though both are terminally weak.

Sterling Euro though is still in the same trading range it has wallowed in for five months. Sterling buyers rush into the market each time this pair tests 1.25 euros (80 pence) and Euro buyers fill their boots whenever 1.28 euros (78.2 pence) is available. So, while the fall from the top to the bottom of that range only took two days over July 12 and 13, the trading range was maintained and the pace of the move was more impressive than the magnitude.  

So where do we go from here? Well that depends on upcoming events; the slowdown in EU growth is already prompting calls for more flexibility on the EU stability pact rules as Spain, Greece and Italy seek the leeway to increase spending in order to avert further declines in their economies. The European Central Bank is mindful of the problems and may have to cut interest rates to help struggling member states even though the inflation rate does not support that policy and the Bank of England may have to follow suit after they warned Brits to expect at least two Quarters of economic contraction – that’s a recession in layman terms.

So while the Euro and the pound may lose ground against the US Dollar, unless either the UK or  EU starts to produce more encouraging economic data, we will see the Sterling – Euro exchange rate continue to bounce along in this narrow trading range. The Euro – US Dollar exchange rate is almost certainly heading lower as is the Sterling – US Dollar exchange rate but the pace of the recent dive has been so fast that there has to be a small recovery before this more substantial downward drive starts to take hold. The rationale behind a short term rally has more to do with the speculative nature of the bulk of foreign exchange trades than anything deep and meaningful. Traders who have bought US Dollars at far higher exchange rates are now sitting on healthy profits but, like home equity, it is worthless unless they crystallise the gain. The only way to do that is to sell those US Dollars and buy back the Pounds or Euros they sold; thus the Euro and Pound strengthen and the US Dollar weakens.

So I guess the best plan for those who have US Dollars to buy is to wait for the bounce, assess when it is peaking and buy their USDs then. Better still; get in touch with a specialist currency provider like my good self and let your broker do the donkey work and suggest a strategy which best suits your specific requirements before letting you know when the exchange rate is attractive enough for you to transact.  

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