The Euro hung around $1.30 in value for much of the early to mid part of 2007. In the last few months of the year, it began an impressive surge that paused briefly in early 2008 at around $1.48. Analysts began to wonder if the Euro’s strength relative to world currencies was finally reaching a peak. After a couple months of floundering in the mid-$1.40s, the Euro broke loose again and climbed over $1.50.

Many analysts began to speculate that the Euro would reach $1.60 briefly and finally see a top. Some analysts used technical analysis to come to this conclusion, while others looked at economic fundamentals. The US economy, while still weak and still showing troubling housing and credit data, appears to be nearing a bottom. Often currency speculation develops well ahead of economic turns. The dollar has been firming for a couple months against most world currencies, suggesting it is positioning for a strong turnaround if the economy picks up in the second half of 2008.

The Euro has been the lone ranger in its continued rise in the last month. The Euro touched $1.60 early last week and immediately retreated. It fell sharply following some modest economic events. The sharp fall to its current value (April 29) of $1.5567 shows that speculators may finally be thinking the Euro has maxed out its strength. It will take some time to see whether the current pullback is merely a short-term correction, or the beginning of a reversal that plays out in the coming months. If nothing else, it is one of the stronger bounces the dollar has made against the Euro in some time.

While many European businesses and travelers have enjoyed the opportunity to take advantage of cheap American products and services, many members of the European Central Bank would prefer to see the Euro pullback a bit. An overheated currency can make it difficult for countries to attract foreign investment and export goods. Currency position is always relative to other world currencies, but there is no question the Euro is especially strong relative to other world markets at the moment. Some have wondered for months if the Central Bank may look to intervene in the market at some point.

The effect of the US economic tax rebate package on the dollar is yet to fully play out. The efficiency with which stimulus package developed went a step further as direct deposit payouts began Monday for some Americans. This was almost a week ahead of the initial schedule. Most taxpayers who filed by the April 15th tax deadline should receive direct deposit of their rebate by May 16th. This is remarkable given the passing of the bill in February and the busy tax season. Paper filers should begin seeing checks as of May 16th. Payouts will continue, based on the last two digits of the primary filer’s social security number, into July.

The dollar has also made additional strong moves against most other world currencies, including the Pound, the Yen, and the Swiss Franc. The dollar seems intent on holding above 104 yen for the meantime. One telling sign that dollar speculative interest is picking up is that a five-year low in consumer confidence and negative housing data had little impact on the greenback. This suggests speculators and world traders may have exhausted their negative sentiments about the currency.

It will be hard for the dollar to mount a huge surge in the early summer as gas and oil prices look poised to climb higher. However, any signs of a stronger US economy in the latter months of 2008 could see a rapid reversal of the negative dollar positions. The dollar could easily rebound to pre-slide positions against many world currencies. This would likely coincide with gains in the stock market and consumer confidence.

Market Recap

Stocks were fairly flat on Monday and Tuesday as the equity markets seem to be awaiting their next moves. The Dow was down 39 points Tuesday as the NASDAQ and S&P were little changed. Investors have digested some negative news in the last two days with little response. Consumer confidence reached a 5-year low showing that many Americans are still scared about the economic situation. Countrywide reported a hugged loss while MasterCard had strong earnings. Oil dropped finally on Tuesday following another strong run by both oil and retail gas prices. Housing data showed that home prices are dropping faster and foreclosures continue to mount.

Neil Kokemuller
Tuesday, April 29, 2008
11:26 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.