Euro is Going Straight Down

Author: , on May 09, 2008

The Euro is going down.

There has been a lot of hype around the Euro and it being a hedge against a declining dollar.  This hype caused the Euro to hit almost 1.60 to the dollar a couple of weeks ago.  It has now come down below 1.55, and everybody is talking a correction in the Euro and the rebound in the dollar.  The Euro is still at a bloated valuation and this is the beginning of a major turn.

Lost in all of the hype is the reality that the Euro is a currency, not a commodity.  Its advance has been due principally to the reality that Europe's history is one of massive inflation (many attribute the rise of the Nazis in part to this) and Jean-Claude Trichet, the ECB's chief banker, is understandably reluctant to lower interest rates while commodity prices are increasing.  However, a recession in Europe, strong calls from Southern European countries (Portugal, Spain and Greece) to weaken the Euro, as well of from leading exporting industries in Germany (auto, Siemens, etc.) are causing the ECB to more clearly analyze the problems created by the Euro's strength.

Against this backdrop, Bernanke, who is also a student of history, is trying to heed off a 1930's style depression.  He lowered rates quickly in response to an emerging housing and subprime crisis which may have saved the banking industry.  However, lower rates will not last and he will be forced by rising oil and commodity prices to raise rates as early as the summer.

The Euro was designed to trade around parity with the dollar.  It may not get back there any time soon, but ultimately the strongest pressure on currencies is purchasing power parity.  It will go back in that direction very quickly.

I am not a chartist, but I've been looking at the 5 year Euro - dollar chart.  I would expect in a couple of years it will look like a head and shoulders pattern.  I also note the blow-off move from 1.43 to 1.54 at the beginning of 2008.  Any sustained move below 1.54 and this gap will be filled quickly.   It is a crowded trade that will be unwould quickly.

Remember, the Euro is a currency, not a commodity.

Disclosure: I own September 2008 Euro puts and a lot of them.


  • George Bush

    May 12, 2008

    I want a weak dollar to prop up all of the relic manufacturing in the US. The dollar is still too strong to do that so look for me to push it down. I'm going to lassoo that dollar so low, everyone will have to buy our American made exports. How else am I going to keep this economy going? Some so I'm de abusing the currency, but I was never abusing it in the first place.

    We need a low dollar to keep America secure at home and broad.

  • Sam Cass

    May 09, 2008

    I tend to believe you are right and that we are near a dollar low. I think most of the bad news has been priced into the dollar. As long as there aren't any other major surprises, I don't see the dollar dropping much further. Not sure I see it rebounding though either. The Fed isn't going to raise rates anytime soon. Even if it does, not sure that will change the value. The Fed raised rates over the last couple of years and the dollar still fell. It depends what other parts of the countries do also.

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