So how Low can the euro go?

Foreign Currency Exchange Outlook: Market prices of securities do not move in a straight line, of course, and some analysts are already talking about the dollar move as already over, or nearly so. Bloomberg reports that Foreign Exchange analysts at Barclays, Merrill Lynch and Morgan Stanley, among others, say we shouldn’t bet on any more US dollar gains.

This is because the economic situation doesn’t support a rising US dollar—big problems remain, like the trade and budget deficits.

To say the US dollar rally is over or nearly over is to fail to recognize the power of technical analysis.

Yes, fundamentals can always trump the technicals, especially unexpected fundamentals. The technicals serve to measure trader sentiment, which is mostly determined by the fundamentals. But as George Soros says, the technicals become a factor in their own right when a move is big enough. This is because cascading waves of the newly convinced keep joining the new move. After the first and second corrections, additional waves of the newly converted jump on the bandwagon.

We need corrections to bring in the new Foreign Exchange Traders. Corrections are bad only if your stops were set too close and you miss the second and third waves. The use of the word “wave” is descriptive and doesn’t suggest that we buy into any “wave” theories, Elliott or otherwise. But the price progression on the chart during a big move does look like waves and we are not willing to give up a perfectly good word just because some nutcase theorists are trying to grab it for their exclusive use.

So how Low can the euro go?

Estimates are all over the place. One idea is that the euro tends not to fall more than 2% under the 200-day moving average, which would cap the move at 1.4920. We say the sky is the limit.

How about 1.4366, the Jan 25 low?

The 50% retracement of the move from the Nov ’05 low to the July peak is about 1.3870. If the current move is a reflection of worsening conditions in Europe and the rest of the world while the US is already seeing recovery at the end of the tunnel, this is not a silly idea. Or to take things to an extreme, how about a 50% retracement of the 7-year dollar slide? It started October 31, 2000 at .8229. The high, as we know, was 1.6040 in July. A 50% retracement would be 1.3870. And why not?

We can afford to think big.

Bye For Now

Barbara Rockefeller - Rockefeller Treasury Services

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