FX Outlook

Last week started with the euro (EUR) plunging to 2½-month lows against the USD amid concern that the Irish bailout was not big enough and contagion fears to other euro zone members. The single currency reversed course to rally in the latter part of the week as the European Central Bank (ECB) announced it would continue to provide liquidity to the system into Q1 2011.

After another tumultuous year in global financial markets with more unprecedented government intervention, the outlook remains uncertain to say the least. The guarded optimism at the end of 2009 has been replaced by a more subdued view, seasoned by the realization that although the juggernaut may have slowed, any accurate forecasts of its eventual halt and consequences are probably unintentional.

The interesting financial news this week besides Irish debt was the market and economists' outspoken criticism of the Fed's quantitative easing — the Fed's tactic to liven up the U.S. economy.

If one is asking about the possibility of a second round of quantitative easing (QE) by the Bank of England (BoE)in another attempt to stimulate the British economy, then the answer is maybe, but probably not.

Since the Fed first indicated that it was prepared to provide additional support for the U.S. economy on Aug 27, the U.S. dollar index has dropped 6.5 percent.

My last paper published in the FX Outlook, Building with the Brazilian BRIC, dealt with growing economies of widely-used BRIC acronym for the emerging economic countries of Brazil, Russia, India and China. Specifically, I talked about the economic success story of Brazil. If you recall, I said "the bottom line is that Brazil's fundamentals look good.

The current theme in the foreign exchange (FX) markets has concerned the dramatic decline of the U.S. dollar (USD) following the Federal Reserve's last official statement alluding to another round of quantitative easing (QE) deemed necessary to support the sagging U.S. economy.

In light of China's status as the world's largest exporter with the largest trade surplus, undervaluation of the CNY has been criticized by other nations in the latest IMF and G7 meetings. This issue has dragged on for years, but has become increasingly sensitive lately in the face of lingering high unemployment in the U.S. and Europe amid the slow recovery from the recession.

In late August I put out a warning to clients, colleagues, family and friends — those who I felt may be impacted — that during the month of September the currency markets would experience a VERY BIG MOVE.

On August 17 I wrote about commodity prices and their relationship with the dollar due to the fact commodities are priced in dollars. I want to revisit this topic with some data that has occurred since mid-August that shows what happens when the dollar is devaluing as a result of the Federal Reserve printing so much money.