I am sure this is a question that haunts most of the today’s traders. And of course if you would know the answer, we would not know on which island you would live :).
A simple graph (at the beginning of this blog) is showing that the EUR/USD pair has ramped up from 1.3552 to 1.4825 (as of today May 4). This is a historically large level, as the EUR/USD has rarely jumped above 1.5 (and this only in the great crisis). So why is the dollar so weak nowadays versus the Euro?
There are several reasons for that I guess:
1. Large USD deficit
I was recently reading an article in The Economist showing that by the same method of calculation, the US budget deficit is larger (as a % of GDP and at 11% or so) tha the one of Portugal. A large deficit also means problems for the dollar, since the US government has to finance this somehow and devalue the currency. Thus the consequence.
2. Large US inflation
The specter of inflation looms over the dollar – among the top 20 developed countries, US now seems to be the one with the largest forecasted infaltion. No wonder, since the quantitative easing practiced by FED is showing its teeth on the USD.
3. China pulling out
China was the largest creditor in the US but now is slowly pulling out of this (or so some people say). This means selling the US government bonds and buying assets somewhere else. This would explain why the EUR/USD is strengthening.
All in all, not a nice context for the USD.
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