Will the Dollar Rally

The Dollar rallied yesterday during Bernanke’s speech, because he acknowledged that inflation posses a long term liability to the health of the US financial system. As a trader I would be skeptical of Bernanke’s resolve to raise rates to fight inflation. The U.S. financial system is hanging on by a tread and the FOMC is perceived to be Dovish. The dollars rally will be short lived, and there is severe support at 1.58. The market has been range bound for months due to the indecision surrounding the world economy. Will a recession in Europe force the Euro to retreat, or will a recession in the U.S. spark a dollar crisis? Let me reiterate that as a trader never trade against the trend. The U.S. will have a more severe recession for several reasons. The U.S. economy is more dependent on consumer spending, the price of oil has increased inflation in the U.S., the ECB is containing inflation, and they are no where near a liquidity trap like the U.S. Governments in Europe have many more social welfare programs that will lengthen the recession, but make it less harsh. The Europeans have traded productivity for supposed security. The recession will be shorter and the U.S. will return to growth faster than our European counterparts.
This is a short term outline on why the USD has depreciated against the EUR. The major reason being the U.S. current account was unsustainable, and depreciation was eminent. The current account is still large, yet it does not drag on GDP like the previous gapping trade deficit. The rally seems to suggest that some traders believe the Euro to be over valued. Perhaps, the EZ has a negative current account which is at 4.6 billion for the month of May about 2 days of the U.S. current account deficit. The U.S. current account deficit is still around 15 times larger than the European current account deficit. Not a bullish sign for the USD. In the long run the market is guided by interest rates and risk premium’s which are more favorable in Europe for the time being.