by Nouriel Roubini
The turn-of-the-year profit-taking on long USD positions creates a near-term blip in the dollar's uptrend but doesn't alter the medium-term trend of appreciation versus the euro.
The four horseman of the carry trade apocalypse - Deleveraging, Risk Aversion, Growth Differentials and the Dollar's Reserve Currency Status - would need to retreat before we see a sustained pullback in the EUR/USD from the slide to near-parity ($1.10-$1.30).
Governments, banks and other firms are still scrambling for dollars to repay their USD-denominated debt while signs of global recession and credit crisis spur on the flight-to-safety in U.S. Treasuries.
European sovereign bonds offer an alternative but inferior safe haven because of the European bond market’s fragmentation and exposure to emerging Europe.
More aggressive policy response in the U.S. compared to Europe, could bring the U.S. out of a recession faster than the Eurozone (though growth will most likely remain subdued for some years to come), supporting the dollar against the euro.
In the longer term, however, once risk appetite revives, the greenback might lose its defenses in wake of worries surrounding U.S. public debt expansion and the potential inflationary effect of quantitative easing.
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