Oooouuuuuuuiiiii... it has been a true roller-coaster ride for the US dollar this summer. We have not seen such huge fluctuations in the US currency since the IT bubble burst in 2000. For several days during the last month EUR/USD has traded within intraday ranges of 3-4 big figures. Hence, these are challenging times for corporates with dollar exposures. Even for short-term exposures, it is very risky not to hedge commercial dollar transactions. The severe credit crunch that causes havoc within the banking sectors on both sides of the Atlantic completely overshadows the fundamental backdrop and makes the short-term dollar outlook highly unpredictable.

We expect that the dollar recovery which started in the second half of July will resume once the dust has settled. The economic outlook might be dire in the US but it does not look much brighter in Europe. The Federal Reserve may well keep interest rates stable at the current low level for an extended period, while the ECB is expected to ease rates aggressively during 2009. Hence, a narrowing of the interest rate differential should be instrumental in driving EURUSD lower during the next 12 months.

The central bank’s position is clear: it will use the instruments available to ensure that the financial system works and that well-run financial institutions do not face liquidity problems. If that means the central bank going further in specific situations than it otherwise would under normal market conditions, it will do so.

Read more about the new measures in our report Central Bank Watch Denmark

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