FYI | Jul 24 2007
By Chris Shaw
As investors continue to switch from the US dollar to alternative currency investments the euro remains a beneficiary, this week trading at a record high of 1.3845. According to Danske Bank chief strategist Teis Knuthsen further upside for the euro beckons, with a break through 1.40 seen as likely.
His view is while the move won’t be a straight line and there could well be a correction to around 1.3670 before the uptrend continues the number of supportive factors working in the euro’s favour indicate further gains.
These factors include a global economy growing at well above trend rates at the same time as monetary policy in most markets remains accommodative. In contrast the Federal Reserve in the US is on hold, which Knuthsen sees as a negative for the currency in relation to other markets as US interest rates have fallen in relative terms.
In addition, the latest rally in the euro has been accompanied by and supported by an increase in the oil price, which he suggests directly benefits the euro at the expense of the greenback.
At the same time the US housing sector issues remain at the forefront of investor concerns and while there is potential for this to spread to the broader economy the currency is likely to remain under pressure.
These conditions are not expected to change too much in coming months, so the Danske Bank view is the general trend in currency markets of a weaker US dollar is likely to continue.
The wild card remains the sub-prime credit issue, as while the problems are centred on the US it should only be the US dollar that suffers but if there is a broadening of the credit issues the euro could then come under pressure in Knudsen’s view.
In the meantime the bank expects the euro will break through the 140 level in coming weeks, with a move above 1.3850 to signal a test of 1.3930 and then 1.42-1.44. On the downside the bank suggests a break of 1.3750 signalling a likely test of 1.3666.