In light of the dollar's recent demise, let's pause for a moment and consider how a European technocrat might think.

Your currency is up about 11% against the dollar this year. That rally may rekindle confidence in the currency that's been circulating in the 12 eurozone countries for the past half-year. But as a policymaker, you're probably becoming concerned about how the euro's strengthening against the buck could negatively impact national economic policy goals.

One of the biggest worries facing European policymakers is keeping their budget deficits in check. The big three -- Germany, France and Italy -- as well as Portugal are struggling to keep their deficits under the 3% of gross domestic product stipulated in the 1995

Stability and Growth Pact. If the countries fail to rein in spending or enhance revenue from economic growth and taxes, they risk reprimands and sanctions from the European Union.

With fat socialist spending programs in place, eurozone countries are unlikely to curtail spending in the near term. That turns up the pressure to fill tax coffers and balance the budget by increasing economic growth. And where did the majority of Europe's growth come from last year? From exports. About half of the region's growth came from exports in 2001. While the U.S. isn't Europe's only trading partner, it certainly is one of its most important ones, and a strong euro hurts the continent's biggest growth engine: exports.

Last Fourth of July, the September euro FX futures (ECU2:CME) were even lower, trading at a contract low and down 19%. A nearly 20% year-to-year increase in the value of the euro undoubtedly crimps sales of European products in the U.S. and stalls export-led growth and tax revenue flows. The latest Ifo survey of German business sentiment works to confirm this view. The export-expectation portion of the survey fell to a four-month low in June.

This situation suggests that Eurocrats could be better served by favoring a weaker euro policy. To halt further rapid gains in the euro, EU officials are likely to issue statements favoring a slower appreciation in the price of the euro, and they may take coordinated intervention action to support the dollar.

Technically, the September euro FX futures had their biggest overbalance of the year last week, suggesting the market will fill gaps down to 0.9550.

Sweet Momentum

October sugar (SBV2:NYBOT) is showing powerful action off a contract low. The contract closed two prior gaps (from June 12 and 17) in the past two trading sessions and traded above its 50-day moving average line (not shown in the chart below). Because the contract closed just below 78.6% resistance after big up days, it's likely to pull back Monday. (The New York Board of Trade was closed Friday.)

The move off the bottom has established sugar as a potential momentum market after the contract registered a critical mass of at least five gaps, laps and expansion bars in just eight trading sessions. Look for sugar to pull back to the 5.35-5.25 level before resuming its nascent momentum move.

Heavy Metals

In the metals, silver has kept pace with gold's descent in recent sessions. Although the pair are not perfectly correlated -- silver has more industrial uses -- the contracts move together. The following chart, showing how the contracts move in tandem, is typical of their price relationship. But notice the recent price divergence between the two: December gold (GCZ2:COMEX) closed lower on the week while December silver (SIZ2:COMEX) advanced.

Wednesday's late intraday rally in silver also looked like light-volume, local manipulation, a tipoff that the session's higher close may be unsustainable once metals reopen Monday. The following two-hour chart shows that sellers have defended the 5.000 area, at the confluence of the 50% retracement and 127.2%

extension levels. Acceptable reward-to-risk shorts can be established on any retests of the 5.000 area with the view that silver will play catch-up with gold's descent.

Finally,

volatility has been contracting in crude oil, setting up the potential for a larger-than-normal move in either direction.

While volatility contractions don't predict direction, such compression on a retest of a market high that has been capped by

retracement and projection resistance suggests the next move will be down.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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