The British Pound has quietly surpassed $1.50, after holding in the $1.45-1.48 range since the first week in April. One Pound currently fetches $1.5017, after trading over $1.51 earlier in the day on Tuesday (May 5). The Euro has dipped a bit since piercing $1.34, but still sits at $1.3275. Tuesday morning’s price marked the high point for the Euro against the greenback since April opened.

The Pound is near its 2009 high point which was near $1.53 in January. The Pound-dollar ratio has climbed about 14 pips in under two months since it touched a long-term low point near $1.37 in early March. The Euro meanwhile has traded in the $1.29-1.37 range for the past two months since forming a double-bottom on long-term charts near $1.25 in late February to early March.

Why the recent surge in the major European currencies against the dollar? The most obvious answer is simply that the ratios of the Euro and Pound against the dollar are reversing the trends that have developed over the last year as the stock market and global economic picture took shape. The Euro and Pound both were near all-time highs against the dollar before mid-2008 when many sectors of the US economy began to weaken or change direction.

Oil and gas price spikes helped drive the European currencies higher against the dollar up to high marks of $147 per barrel and $4.11 per gallon in mid-July of 2008. Rising oil was very much an anti-dollar factor during early to mid 2008. As oil shaved off over $100 per barrel, bringing gas down below $2 per gallon for a period of time, the dollar sharply strengthened its position through the coinciding trend reversal against the European currencies.

With US stocks on the rise and oil now back to $54 per barrel, after a low of $32, the Euro and Pound have pushed higher again. If Fed Chief Ben Bernanke’s suggestion that the recession’s end is likely coming soon holds true, it seems sensible that oil and gas will rise, and the Pound and Euro would rise against the dollar as well.

Some analysts say not so fast. While the Central Bank seems settled at a zero per cent base funds rate for the moment, the group is probably watching closely to be sure they aren’t late jumping back in to increase rates when necessary. The Fed’s policy for several months has been to hold rates low as part of its aggressive approach to help spark the economy. However, once the economic bottom is clearly reached, which some think is now based on recent housing and credit data, rapid reversals in major market sectors could begin.

Some economists have begun to point out that, based on historical analysis, stocks move about four months ahead of the economy when it pertains to signaling economic recovery. The Dow is nearly 1700 points off its low of just a couple months ago and investors definitely seem more optimistic. If the economy is poised to take off, which is by all accounts a good thing, the Fed is going to be alert to the potential need for a quick hike in interest rates to avoid inflation. The focus is going to be on a healthy and long-lasting recovery, rather than a rapid return to risky ventures and destined-to-fail schemes.

Neil Kokemuller
11:55 PM EST
Tuesday, May 5, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.