Strong USD weaker Euro

When USD has devalued so much, other major currencies are bound to react against the trend. The slowdown in US is spreading to other regions, Europe, Japan and even China. The other major currencies did turn higher and higher for several years but soon they reach a point where they have to face the impact of slowdown too. In order to facilitate growth, central banks in other countries have only a few gimmicks to play and cutting interest rate, devaluing their currencies, etc., are the main actions they can take.

Do you remember earlier this year Canada started cutting interest rate in preparation for the slowdown in US? That was what I could recall the first signal of what other countries would or must do in order to cope with the devaluation of USD. Once this process of what I have called "competition by devaluation" has started, it can hardly be ended. One terrible consequence is inflation, which will stay with us for a long time. But in the short term, USD may stay strong when other currencies are competing by their own devaluation. The impact on oil, gold and other commodities are quick and immediate but for the medium to long term, I'm afraid their prices will go much higher after their retreat in face of a temporary stronger USD.

Would now be the golden opportunity to buy low? Well, that depends on how low. Take New Zealand dollar as an example. At this time last year, NZD fell to a new low and many were bearish. But not too long, NZD started to rise up and up again. So, the current low of NZD, AUD, ...may indeed be good buying opportunities. Well, wait for further rate cuts in NZ and you will see new lows.

As for AUD, I really doubt how far their central bank may like to devalue. Why? Australia's main export is metals to China and its mining industries are the main economic force behind. Surely you would like to see a strong AUD when China and other emerging markets are still too hungry for metals and other basic materials. Ask Rio Tinto and BHP; they will tell you despite doubling metal prices this year, China still takes it all! Yes, China may also suffer from the US slowdown but think about the construction works that China may need. Its population and economy are still growing and lots of infrastructural reconstructions are required to restore the land hit by the terrible earthquakes earlier. That explains why AUD won't devalue to help China pay less to Australian mining companies.

But how about Japanese Yen? Well, it is falling everyday. Yes, of course! Japan wills the fall of Yen to sustain its export and production. That is the main tactic Japan can play after many years of recession. I would think sooner or later Japanese investors must go back to hold other currencies when BOJ lowers interest and the Yen continues to devalue.

What about Euro? It goes hand in hand with oil, I think. Its highest point was 1.6 and has now dropped a lot. However, if you recall, a few years ago, Euro was trading under 1.2! So the current 1.4-1.5 is not that bad after all. Would Euro devalue? Yes, but not now when oil is still in high demand.

What is interesting is the question about investing in alternative energies. Wind, solar powers, etc., and bio fuel seem to be the new stars. But be very careful. They are valuable as long as oil price stays high. If oil falls, they go down with it too!

So why not take a good break and come back in Sep? Not a bad idea. Why? If you look back last year, you would note that August was the black month when all major stock markets touched new lows. After the big fall, the markets turned up again in Sep and reached another peak in Oct. May be such history may repeat this year.