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Recent Dollar Gain May Mean Big Drop Soon

August 11, 2008 at 11:02 by Andriy Moraru

U.S. dollarThe recent fast growth of the U.S. dollar against the euro doesn’t mean that it’s out of the long-term bearish trend. Slowing economy and the risk of rate cuts even with a rising inflation are still weighing down on dollar.

Since the beginning of August the dollar surged 4 percent against the Eurozone currency. This was enough for many large investing banks to advice their customers to stop betting on more gains. Analytics believe that the ongoing housing and financial slumps in U.S. won’t allow Fed to raise the interest rate this year.

According to Barclays Plc (a London-based bank) and Merrill Lynch & Co. (a New-York based bank), the 5.1 percent growth of dollar against the basket of the 6 most-traded currencies that was seen in the past 3 weeks can’t be sustained by the American economy.

There is a little chance for the U.S. to return to the previous high rates of the GDP growth and an inflation rate below 3.3 percent. Since 2000 dollar lost more than 44 percent against the euro and GDP growth slowed to 1.9 percent, while inflation accelerated to 5 percent. Current interest rate situation offers no attractive opportunity for the Forex traders to bet on the U.S. dollar in a long term.

EUR/USD rose from 1.4944 to 1.5065 as of 8:50 GMT today — after it opened with a rather large gap copared to Friday’s 1.5005 close rate; currently EUR/USD demonstrates the strongest gain since June 6. USD/JPY declined from 110.37 to 109.74.

If you have any questions, comments or opinions regarding the US Dollar, feel free to post them using the commentary form below.

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