Eurodollar! What Is Going On?

It’s a brand new month, but the underlying issues from September are still controlling the markets. The question is why is the Euro so strong and how long will this rally last?

Rumours have been circulating the markets for months now about whether the FED will go into a second round of quantitative easing. A move into QE2 would weaken the Greenback significantly and as a result, investors are running scared into the Euro. Why would they do that I here you ask? The Euro should be tumbling, downgrades in Spain and a bailout of Anglo Irish which totals more than the entire tax income of Ireland. The single currency should be sitting unclaimed in the lost and found with the Dollar. The problem for the USD holders is that selling vast amounts into many other currencies will push those markets through the roof thus costing them even more to get rid of their Dollars. Eurodollar is the most liquid pairing of them all and as a result, traders have moved billions of USD into Euros. As a result, cable has shot up back towards the 1.60 level again, but Sterling-Euro is trading on 3 months lows.

Yesterday afternoon, we had some very positive data from the FED with the GDP figure coming in at 1.7% ahead of a forecast of 1.6%. Strong figures from the jobs market and the Chicago PMI strengthened the Dollar over 2 cents against the Pound and as a consequence, squashed Sterling-Euro down below 1.15. Don’t count on these optimistic announcements to calm fears of QE2 as most data has been revised in the weeks following the initial release. Cable has since rebounded this morning towards where it was trading before the US figures, which is further proof the Greenback is the weakest of them all at the moment.

With plenty of data due out today, volatility will continue to rule the markets, but it leaves us with a new question, when will the madness of Eurodollar end? The likely answer to that lies with Bernanke and Co and any comments they make over the next month. If the positive figures keep on coming and withstand the recent battering of downward revisions, QE2 could be avoided. But, with a struggling economy and threats from China with the undervalued Yuan, you get the feeling the FED wouldn’t mind devaluing the Dollar making importing from the US more desirable and propping up their fragile financial system.

Report by Tim Lewis

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