Why We Like the EUR and See Further USD Weakness - by Douglas Borthwick

We believe that the only path left for the US economy is for USD weakness to continue through the rest of the year and beyond. There is little momentum coming from the housing and employment legs of the US economy, however export-led growth continues to move forward. We take note that when President Obama speaks on the economy he makes sure he does so from an export-led factory floor. Treasury Secretary Geithner and members of the Federal Reserve all resort to talking about exports when discussing a US recovery. In 2010, President Obama said it was his administration's number one priority to double US exports in 5 years. This is not done through having a stronger USD, but rather through having a weaker USD.

Support for Europe and the EUR comes from every country, while support for the US and the USD in particular is evaporating. China continues to show displeasure at the US fiscal position and actions, now fully expecting an announcement of further quantitative easing measures. Russia believes the US is floundering in its leadership, while the Brazilian government is troubled by the 'melting USD'. In Japan, Finance Minister Noda acknowledges the strength of the JPY is not a result of Japanese strength but rather USD weakness. The only ratings agencies yet to downgrade the US are Moody's, S&P and Fitch. We believe it is only time before one of these agencies catches up with their counterparts in the US, Germany and China.

Our position remains the same. We favor a weaker USD across the board. Against the EUR, against a basket of Latin American Currencies, against a basket of Asian Currencies, against a basket of Commodity Currencies and indeed against the EUR. While most will agree with our emerging markets and commodity currency stance, healthy skepticism remains over our EUR/USD call.
This skepticism has followed us from our call for a higher EUR/USD when it was trading at 1.2000 and continues today. We favored long EUR/USD at 1.2000 on the back of the demand we were seeing from Asian Reserve Managers, and our belief that Europe would rally to dissipate peripheral weakness. This belief continues today, however our view is now bolstered by the weakness in the US economy, along with impending downgrades from ratings agencies and the inevitable further quantitative easing.

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