I get the distinct feeling that we have in fact put in a near-term top in EUR/USD. QE is very much priced into the market and the Fed is touting its flexibility to do more or less QE as the economy evolves. The market has at least one eye on European sovereign debt after ignoring them totally in recent weeks.
Nothing concentrates the mind like lousy price action, so the lower EUR/USD dips, the more the market will focus on the risks poised by the Irish banking morass, the political circus in Italy not to mention the risk event (however slight) of the G20 actually coming up with a framework for some sort of plan to rebalance the global economy this weekend in Seoul.
The Fed is in damned if you do, damned if you don’t mode. If they did nothing and the US economy slipped back into recession, foreign governments would be screaming that their lack of preemption dragged the global economy into recession. Since they did act preemptively, now they get to scream that the Fed is debasing the dollar and creating unwanted capital inflows. The Fed is pretty good at blocking out self-serving chatter from the cheap seats…
I think the high near 1.43 last week will prove a top for the balance of 2010. Markets trade most violently in reaction to surprises. Would a continued dollar fall be a surprise? Nope. A dollar rise would be, and that is where the risk lies, in my view.
