The fate not only of the dollar was changed … but so was that of the euro on Jan. 25.
The euro has become known as the anti-dollar. Why? The two biggest places for large institutions to invest their money are in the dollar firstly, but after that it’s in the euro.
These are two of the biggest pools of liquidity in the world. Therefore if money runs from the greenback, it tends to end up in the euro.
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So when the Fed stated on that Wednesday that interest rates would remain “exceptionally low” through late 2014, it set the tone for the dollar to head lower but at the same time, it gave the green light for the euro.
In essence, the Fed is saving the euro by default due to them sacrificing the dollar once again (as they love to do).
You see, the Fed knows that if it can send a signal to the institutional investment community that the greenback isn’t going to be the place to invest for several years to come, then the Fed knows that they’ll head elsewhere.
Where specifically will the money head? As the dollar heads lower, these institutions try to find places that will retain their value and even profit as the dollar declines. What profits when the dollar declines? International stocks or domestic stocks that have huge international operations where they derive much of their profits from overseas.
But also, money runs to commodities and foreign currencies because these too will rise significantly against a falling dollar.
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In essence the Fed is forcing the money to where they want it to go…and one of those places is to the euro to support it.
You see, they know that if they can “force the hand” of institutional investors back into the euro as they run from the dollar…then they know that the sentiment will improve for the euro and European assets.
In fact, we’re starting to see it happen already. The European debt crisis still hasn’t been resolved, yet the euro has broken a downtrend line against the buck now and European stocks are on the rise once again despite the lack of a solution in the European debt crisis. Why? One of the main factors is the breakdown in the U.S. dollar once again.
It’s propping up the risk-on assets like stocks, commodities and foreign currencies such as the euro. And as the euro and European stocks continue to improve it will circle back around to further improving the sentiment for riskier assets. In other words, it helps to jump-start a cycle that supports “risk assets” again.
So the euro will rise now overall throughout 2012 and it’s not because the euro is so great. It’s simply because it’s what the Fed is orchestrating by discouraging inflows into the dollar and even encouraging outflows away from the buck.
On top of this, there hasn’t been a larger short position in hardly anything over the last year than there has been in the euro.
This turnaround in the trend of the euro is catching tons of large instructional players off guard and is causing them to have to reverse their bearish positions as they remain baffled and perplexed as to how this is all happening. The reversal of massive short positions will further fuel the fire in the euro’s favor which will take EUR/USD even higher.
In the end, the Fed will get what it wants and that’s a lower dollar and thus a higher euro against it, which will cause EUR/USD to end 2012 much higher than where it sits right now.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.
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