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The euro will break up – at least that’s what a bunch of economists and financial journalists have been shouting.

Well, they’ve got that dead wrong.

I’ve got a different take. The euro is still a long way from winning the “ugly contest.”

Don’t misunderstand me. As a trader, I’ve been bearish on the euro over the past year, and for good reason. It’s been on a distinctly downward trend. And that’s been the right view.

But it’s all changing. And here’s why…

For starters, the euro broke one of its downtrend lines about a week ago.

Check it out for yourself below.

The Charts Don’t Say that the Euro is Breaking Up

Please click here to view larger image

The new buying pressure on the euro makes it very clear the currency is not about to break up any time soon.

I believe the negative sentiment on the euro already reached its low point.

The way I see it, it was actually “priced for a break-up.”

But when things went from “break-up” to simply being “bad”, the euro gained because those sellers, who were so convinced the currency would break apart, are now scampering to the sidelines, because their stops are getting hit and they’re starting to get margin calls on their wrong judgment.

Another huge reason why the euro will recover in 2012 is that the Fed just launched its next attack on the U.S. dollar.

Last Wednesday, the Fed said it would keep interest rates unchanged within a range between 0% and 0.25 – all the way through late-2014.

It was then that the breakdown in the U.S. dollar index solidified.

The reason the euro will rise against the dollar isn’t because the euro isn’t doing bad… it’s because the Fed is making sure the buck does worse!

You can see the proof in this chart below with the U.S. Dollar Index recently breaking its multi-month uptrend line in green.

The Dollar Index and Euro Can’t Fall at the Same Time…

Please click here to view larger image

I also believe the euro will appreciate because the downward pressure on the dollar will spur inflation. Thus, money will run from the greenback to commodities and foreign currencies, because both of these tend to do great in a “dollar dilution” environment.

Therefore the euro will head higher as the Fed devalues the dollar by ensuring inflation.

Ugly Currencies Don’t Always Lose Value

It’s often said that the key to the currency market is to see who’s the winner in the “ugly contest.” In other words, see who is the ugliest… not just which one looks ugly.

Many traders will short an ugly currency, but the they are shocked when it doesn’t go down. Well, what was it being compared to?

In my view, they should have looked around to see if there was there something uglier out there.

Yes, the euro is one ugly currency. No doubt about it. But right now, the Fed is trying to ensure the greenback is ever uglier.

After all, the Fed is the only central bank in the world promising their interest rates will be kept at near-zero low for almost three years – and it doesn’t get any uglier than that!

The Euro Will Continue to Rise… Courtesy of the Fed

EUR/USD continues to rise – even though there is still no real resolution to Europe’s debt crisis.

More bad news seems to come each day from the euro zone, which should be a negative for the currency. However, the impact has already been “baked into the cake” or else we wouldn’t see a resilient, rising euro, given the horrid news headlines coming out of Europe.

So the euro is coming back in 2012. Will it be the best perfomer? I don’t think so. I think the commodity-currencies that benefit more from inflation’s rise will benefit the most – for example, a currency like the Aussie dollar.

So the dollar will fall and inflation will rise, thanks to the Fed. And those traders on the wrong side of euro will all blame rising commodity prices on Wall Street, as they always do.

But remember, no one on Wall Street can print money or control interest rates – so they can’t “make” a trend. They can only choose to protect their wealth by following a trend that the Fed has put in place… and that’s what you should do, too.

Protect your wealth by buying anything that benefits from the decline of the dollar… and yes, that could even include the euro.

Have a Nice day!

Sean Hyman, Editor
Currency Cross Trader

P.S. As optimism over better manufacturing data reverberates around the globe and growth fears ease temporarily, the dollar continues its death by a thousand  cuts. However, there is a way to put those sinking dollars to work in an overlooked part of the currency market. It’s a strategy that is persistently dishing out substantial returns. It’s still a tough market out there, but every investor needs a trump card. To learn the secret of how to grab double-digit gains – even in markets as volatile as  this –click here…

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