First with Financial Comment from Arabia

Secret plan to defend the euro against the falling dollar

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strong-euro-versus-dollar-269225The European Central Bank has a secret plan to defend the euro against a falling dollar. And it is no secret that the falling dollar is a danger to the euro-zone recovery and exports.

Indeed, the ECB would be in clear breach of its treaty obligations if it did not possess such a plan, so we can be quite certain that it is in place. All we can speculate on is at what point the ECB decides to act.

$1.50 euro

For a long time $1.50 to the euro has been a line drawn in the sand. That line has now been breached. It is therefore wise to expect some action from the ECB in currency markets before very long.

Market intervention will be the response to the falling dollar. It is unlikely that the dollar is going to be allowed to fall through the floor.

Most likely a secret plan to support the dollar was a big part of the G20 summit rather than the declared statement about the continuing stimulus packages that are a big part of the problem.

Those betting on a falling dollar now in financial markets could be in for a rude awakening. The dollar has fallen to a 16-month low, how much further can it go?

Any support for the euro would have a reverse effect on dollar-denominated commodities like oil and gold as well as global stock markets. The latter also show signs of topping out and are just waiting for a signal to reverse direction.

ECB move

If you wanted to make money from a falling dollar then you are far too late for this particular party which started back in March. The ECB will have to make a move very soon.

The Japanese are suffering even more from an overvalued yen and would surely join in any concerted plan to reverse the plunge in the greenback.

It is not really surprising that most currency reversals occur at the point of maximum pessimism about the outlook because by then everybody has made their move and there are not enough on the other side of the market for it to move down any further.

All it takes is a word from the ECB and the massive dollar carry trade will unwind.


Written by Peter Cooper

November 10, 2009 at 8:12 am

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