Forex: Where DOES The Buck Stop?

By Vadim Pokhlebkin
9/25/2007 9:24:24 PM
Elliott Wave International

“Today, the euro hit another new all-time high against the U.S. dollar.”

If this is starting to sound as routine as another report of a Baghdad car bombing, get used to it. Or, at least, that’s the consensus out there: The euro’s Daily Sentiment Index, a popular measure of forex traders’ expectations, is at 92%. Only 8% of traders expect the dollar to get stronger from here.

Why? Simple. Blame the “mounting fears over the health of the US economy, exacerbated by the housing crisis and the subsequent interest rate cut by the US Federal Reserve last week.” (The EU Observer)

It sounds like a perfectly good explanation. Until you think about it, that is – because there is one part that just doesn’t fit. Remember last month, when global financial markets – starting with the DJIA – were all but crashing? Right then, the dollar saw a surprising appreciation against the euro. Yes, in the midst of an unfolding U.S. subprime mortgage crisis – a severe economic threat – the buck rebounded. If “bad fundamentals” are really driving the dollar’s trends, how could that “worldwide rush for dollars” have taken place? (Bloomberg).

Well, it did. And the real explanation here, I think, is not in the dollar’s “fundamentals.” Because the world’s perception of the dollar as a safe-haven currency is not a rational, calculated assessment. It’s an emotional one. How else do you explain last month’s rebound, despite real prospects of a U.S. recession (or worse)?

Of course, if you accept this point of view, you must also concede that the dollar’s latest slide to new lows has also had a lot more to do with emotions than reason. And you know as well as I do that the minute the USD gets stronger, analysts will come out of the woodworks explaining how positive, in fact, the Fed’s recent interest rate cut was for the dollar – because see, lower interest rates help boost the U.S. economy in the long run. Spin it, baby.

Elliott wave traders say that probably the one thing they appreciate the most about the method is its objectivity. Unlike the Fed’s interest rate policy, the same Elliott wave pattern can never be bullish AND bearish at once. That rids your trading of an enormous amount of clutter. For example, take a look a this chart from EWI’s Currency Specialty Service daily analysis of the euro/dollar (published Sept. 25):

Tradingfives, Oct 2, 2007

The chart on the right is a price projection of the Focuser Tool from our Fibonacci training software. The price projection of where to look for resistance was made more than one month ago and may be right on target. That the Focuser is consistent with Elliott Wave results is very often significant.