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Trends – Continuing of the fall of the Dollar / A US economy entering stagflation

Firstly, LEAP/E2020 confirms the crisis is still accelerating and should last from June to November 2006, as we had already announced last May. In addition, our teams can now anticipate more precisely two essential developments:

  • the continuing of the fall of the Dollar compared to the Euro, with a new acceleration by the end of September, which will start impacting many export sector forecasts for 2007 (from European agriculture to technological companies)
  • the stagnation of the American economy in a phase of stagflation and the rise of unemployment.

Continuing fall of the Dollar compared to the Euro, with a new acceleration by the end of September

Since the beginning of the year, the Dollar exchange rate decreased from 1,18 Euros to 1,28 Euros, with peaks around 1,29/1,30. These last weeks saw a stabilization of this development thanks to some technical factors favouring the dollar (primarily, the liquidation in Dollars of short positions on raw materials and on the Yen, which obligated a great number of operators to repurchase dollars). But in the background, operators are slowly realising that some fundamentals which had them believing in the endless force of the American dollar are disappearing, such as the structural superiority of the American economy, its higher growth rates, its real estate sector durable dynamics and the foreseeable continuation of the rises of the American Federal Reserve interest rates. 

In just one summer, all these “beliefs” have slowly disappeared; just like these technical factors will disappear in September and be replaced by an entirely new situation for the financial and monetary markets: the operators will no longer have any major argument “to believe” in the strength of the dollar. In the last few months, the markets have integrated the reasons which intellectually demonstrate its durable weakness but, psychologically (because of contradictory long term positions), they have not yet drawn all conclusions. The next few weeks will set the stage of this generalized awakening and will lead the Euro/Dollar rate above 1,30.

This development should in particular draw the attention of multiple economic sector leaders since their anticipations about the Dollar value will impact their results for 2007. While the industrial exporting sectors are concerned, one should not underestimate the impact of the Euro/Dollar exchange rate on European agriculture. Indeed, with the new CAP reform and the merging of world rates for many European agricultural products (such as milk for example), the Euro/Dollar rate fluctuations have a major impact on the EU agricultural exports. In 2006, the majority of the exporting sectors followed the dominant opinions which predicted the continuation of the rise of the Dollar compared to the Euro. They had based their forecasts on an average rate of 1 Euro = 1,16 $. With a rate at 1,28 by mid 2006, one can imagine the difficulties these exporters could encounter…

Read more in the GEAB No 7 / 16.09.2006

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