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A reprieve for the Dollar?

The last two years have witnessed a veritable collapse in the value of the Dollar, which has declined over 25% against the Euro, alone. While opinion remains divided, many analysts are predicting a (temporary) cessation in the Dollar’s downward slide. The reasoning is that the worst possible scenario involving the American housing crisis has already been priced into the Dollar. Furthermore, experts argue that the inevitable loosening of American monetary policy will help boost the American economy by preventing it from slipping into recession. Finally, there is the notion that China will begin to take steps to appreciate its currency relative to the Euro, which has actually risen against the RMB. The law of triangular arbitrage requires that any rise in the Euro against the Yuan must be matched by a proportional rise in either the Dollar/Euro or the Dollar/RMB rate, the latter of which seems unlikely.