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AUD and the EUR surge against the Greenback (update 1)

Posted by Adrian on October 15, 2007

As mentioned in the first post on morbius glass regarding the high euro and the aussie currencies. The European Union is concerned about the depreciating US dollar, as the euro is gaining strength particularly as a high yield currency. The problem is it is effecting exports in Europe. Asia on the other hand is enjoying a brief stint of inflated currencies, India and China both have currencies that have risen in value. Possible reason is the buying power of Asian currencies are rising, making it an attractive currency to purchase or trade. High Asian currencies will also make it appealing for importers of various products, raw materials etc. Although this will add to their own inflation, as prices of goods will increase. But overall China still has deliberately undervalued the Yuan in relation to other currencies, which has been an ongoing issue with Treasury officials from both the US and Europe.

The concerning factor especially for Europe, is if the euro does climb higher against the USD, it may cause a fracture among the European Union as France have demanded that the European Central Bank (ECB) cut rates so France can spur up some growth – and allow the euro to decline in value. French exporters are angry at the high euro which is effecting various industries in France that rely on exports. According to a recent Bloomberg article Germany is concerned with the rising euro, from Bloomberg article:

“With the euro hitting a record high versus the U.S. currency, European exporters are being priced out of foreign markets.”

“Sales of German exports are falling off drastically in the U.S.,” says Anton Boerner, president of the Berlin-based BGA association of wholesalers and exporters. “We’ve stepped beyond the pain threshold.”

France has been particularly vociferous in advocating action to stem the euro’s rise, with Finance Minister Christine Lagarde, 51, even pushing the European Central Bank to sell the currency. She has also called on Paulson to say “loud and clear” that he still backs a strong dollar.”

The coming G-7 meeting in Washington of European and US Treasury officials will be an attempt at some unified agreement of the currency issue. Quite possibly this will be a meeting with no real outcome, as most of these ‘Group’ meetings tend to be, nevertheless the markets may see something in this, so we may see declines in the Euro and a slight rise in the USD before the meeting start. If there is an inactive outcome, the currencies will be restored to the current trading price and the euro may gain ground again.

But could the currency issue become a ‘crisis’? Much like the credit crisis and liquidity crisis of the major banks. At this point Europe is facing massive inflationary conditions from food to a massively inflated housing market.

The aussie has gained significant momentum against the USD, now trading in the 90 cent range to the USD. The Australian CPI figures are due out on the 24th October 2007, it is believed the CPI will show large increases in consumer spending. If this is the case, we may see the AUD rally into the 92-93 cent range. To what point the Reserve Bank of Australia decides to increase interest rates, whether before of after the Australian election in November may be irrelevant as the CPI figures will be enough to convince the markets that the RBA will still raise interest rates sooner than later. When the RBA will step in and depreciate the AUD is anyone guess, the assumption is that the cheap import costs of household goods will be passed on to the consumer, how much will be made in savings on imported products is disputable. It would be fair to assume that any major consumer spending before Christmas will be fueled by the use of credit, adding too higher inflation thus causing even a greater credit bubble in Australia.

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