Thursday, December 20, 2007

Dollar Rising from the Dead

FRANKFURT, Germany (AP) -- The dollar continued to make gains against the pound and euro Thursday amid mixed data on the U.S. economy.
The 13-nation euro bought $1.4335 in afternoon European trading, down from $1.4381 in New York late Wednesday. The pound dropped to $1.9820 from $1.9966.

The sentiment on the dollar had become so negative that this was inevitable. As I wrote last month, when supermodels are aware of the trend in the dollar, the trend is too well known to be exploited.

Many have been calling for the dollar to fall further as interest rates in the US fall while the ECB holds them steady. I have never understood those who cling to this belief; currency movement are more about economic growth than interest rate differentials. The European economy in a number of ways is in worse shape than the US and with the ECB focusing so much on inflation rather than growth, investors are voting with their assets and moving to the area of greater potential growth. I don't think this will last long term though; tax rates are falling in Euro land and are likely to rise in the US over the next few years. A more favorable investment climate in Europe will likely benefit the Euro.

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