The Euro is Dramatically Overvalued

The Euro is overvalued.

Everybody seems to be falling in love with the Euro these days, driving to a recent high of 1.36 dollars to the Euro.  The reasons for this strength (and that of the British Pound) are clear - it is not the dollar and Warren Buffett and George Soros seem to have turned into dollar bears.  Well, the traders are getting a little carried away here.  They are treating it as a commodity, but it is a currency and one tied to an economic area with a lot of problems. Currencies ultimately revert to a level based on purchasing power parity and some expectations of future interest rates in the zones where they operate.  When they launched the Euro in 2000, it was designed to trade at about USD 0.90 to USD 0.95 and that strikes me as continuing to be roughly the area where purchasing power parity is achieved between the Euro and the dollar.  Longer term interest rates in the US appear to be on the rise in the US and not in Europe.  Now, will the Euro go still higher in the short term? Maybe.  But, to those considering buying foreign currencies (and especially the Euro) at this stage in the cycle, I'd suggest that you'd be better off holding onto your dollars and dollar denominated assets.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Anonymous

    June 22, 2007

    I agree with this analysis.

  • Anonymous

    June 27, 2007

    Currencies are a tough game. Your advice concerning the long-term likelihood of a dollar recovery runs contrary to sound arguments that we are in the early stages of what will be a massive currency diversification program by China, India, Russia, Brazil, etc.

  • koej

    September 27, 2007

    It may have seemed like good advice when you wrote it, but the dollar looks horrid here.

  • jhon

    October 21, 2007

    For now the US wants a weaker dollar. Rates in the us will continue to go down so the dollar looks like a sale at this point. Till things change which might be in 09 when inflation will run out of control. Than rate will have to raised.

  • Sam Cass

    June 19, 2008

    Is the Euro was overvalued then, what is it now?

  • Sean Riskowitz

    February 21, 2010

    The Euro is not a currency. It's an experiment.

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