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Dollar relying on Euro to stay afloat

4 Nov

With all the drama in the Eurozone as of late, it is the US Dollar taking centre stage today as it appears more vulnerable than the euro.

Whilst the US economy is better than it’s low in August, with help from the Japanese intervention to weaken the Yen, it’s performance is still not to standard – the dollar has fallen almost 3 percent against the Euro this year. The Financial Times state the US economy, considered to be a relative haven, hasn’t managed to bounce from the Eurozones debt crisis, which shows its reliance on the central bank to balance a dual commitment. Combined, their aim is to maintain stable prices and maximum employment.

Alan Ruskin, strategist at Deutsche Bank said, “The primary negative of the dollar is that it has a central bank willing to pursue unorthodox policy and, while that won’t stop dollar appreciation, it does explain why the euro has not sold off more”.

The Feds Chairman, Ben Bernanke, has been considering options should the economy require further help. Purchasing of mortgage backed securities has been suggestion as one possibility.

Meanwhile, Mario Draghi, the new ECB president, warned of a “mild recession” in Europe. This will not help the US economy recover. Whilst some analysts argue the euro is set to weaken, others believe it will not hit the low of $1.19 when Greece’s debt problems erupted.

Instead, analysts predict it will fall to $1.30 over the next few months, returning to January’s low, but not the critical levels of 2010.

Head of global rates and currencies research at Bank of American, David Woo, says the bank is maintaining a 2012 year end target of $1.40.

Mr Ruskin explains how for a single currency to breakdown, “You need to see a rupture of the eurozone core that results in capital flows leaving the euro”. The Financial Times states that although this is not impossible, it is not yet regarded as the most probable outcome.