Sunday, March 11, 2012

Why it's better to own the euro than the US dollar Shorting the dollar could be considered.

from seeking alpha auther site There are many reasons why a currency goes up or down. Following list gives the most important ones:

Current account balance of the country
Total national debt of the country
Inflation rate
Interest rate

If the current account balance of the country is positive, a country will export more than it imports. As the population of the country exports more, they will receive more foreign money. This money will then be converted into their own currency, which is then spent or put in their banks. As the foreign money is converted into the money of the country's population their own currency will appreciate in value.

The larger the national debt of the country, the more expensive it will be to sell debt to foreigners. The government will then be obliged to monetize this debt to keep interest rates low and to be able to service this debt. Rising debt load will therefore devalue the currency.

The higher the inflation rate, the lower the currency will go. An example is Vietnam, where the dong lost much of its value due to high inflation.

When interest rates are lower than the inflation rate, there is no incentive for foreigners to buy why it's better to own the euro than the US dollar. There is a consequence to a lower currency value.

Very important aspects to look at when placing the US dollar against the EURO :

Let's look at the statistics:

1) Current account

The GDP of the US ($US 14,5 trillion) and the eurozone ($US 16 trillion) are approximately the same, so we can compare the current account balances of the two countries.

The current account deficit of the US is in the order of $US 110 billion per quarter, which amounts to $US 450 billion per year (2011).

For the Eurozone, the 12-month cumulated seasonally adjusted current account recorded a deficit of EUR 44.9 billion.

So in this case, the eurozone is the winner. Europe VS USA: 1-0.

Euro Area Current Account (Millions of EUR)

US Current Account (Billions of USD)

2) Total National Debt

Total US national debt is $US 15.5 trillion. Total eurozone national debt to GDP is 85%, which translates to $US 13.6 trillion. So again, Europe wins by a small margin. Europe VS USA: 2-0.

3) Inflation Rate

The inflation rate in the Eurozone is 2.6%, while the inflation rate in the US is 2.9%. And since we all know the US federal reserve is lying about inflation, the eurozone wins this one by a big margin. Europe VS USA: 3-0.

4) Interest Rate

The interest rate in the Eurozone is 1%, while the interest rate in the US is essentially zero. What's new, the euro wins again. Europe VS USA: 4-0 FOREX INSIGHT TEAM 305-6299490

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