The euro’s slide against the US dollar looks set to continue
Rhodium is breaking out to new highs above $12,000. Palladium looks equally unstoppable. Gold is now above $1,600. Stocks dipped, as the 30-year US long bond yield slipped below 2%. Bitcoin is back above $10,000. That was just yesterday.
There’s a lot to talk about in today’s Money Morning, but something has caught my eye in recent weeks that I don’t see gaining such widespread coverage, even though it is a far bigger market. That is the collapse of the euro.
You can trace the current bear market in the euro against the US dollar all the way back to early 2018. But the latest leg down only got started on New Year’s Eve, since when it has fallen off the proverbial cliff. It might be Brexit. It might be something else. Who knows? But the euro’s prospects versus the dollar is the subject of today’s Money Morning.
Currency markets tell their own little story, often a political one, and the falling euro is telling us something. Here is EURUSD since mid-December 2019, so you can see the drop I’m referring to – from $1.12 to $1.07.
The first eight years of this century – in other words, until the global financial crisis – were the great ones for the currency of the European Union. It almost doubled against the dollar, which is extraordinary for a major currency, going from a low of $0.82 in 2000 to a high of $1.60 in 2008. Since then the euro has been in decline - or the dollar has been strengthening, depending on your point of view.
These are by some margin the largest two currencies in the world. Between them they account for more than 80% of foreign exchange reserves. EUR/USD is the most traded pair in the biggest market in the world. It’s quite easy to make the case that this is the most important price in the world.
I’ve drawn some tramlines on the chart above around the price since 2008, because there is such an obvious and clearly defined trend there. My first observation is just how long these trends in forex can go on for. This bear market has been going on for over ten years. But within that secular bear market there have been substantial counter-trend rallies that have gone on for a year or more.
In 2009, for example; from mid-2010 to mid-2011; from mid-2012 to mid-2014; and in 2017. Get on the right side of those rallies, and you made a lot of money. But the broader trend, nevertheless, has been down.
Today we sit at $1.07, having been at $1.12 on New Year’s Eve. US dollar strength has been the main driver of the move, but the euro has been weak against all major currencies – the Japanese yen, the British pound, the Swiss franc, the Canadian dollar – you name it.
Put simply, the current trend is quite clear and, within it, the euro is breaking to new lows. New lows tend to lead to more new lows and the best way to approach them is to sell them.
The $1.03-$1.05 areas are the obvious first target areas – the lows of 2015 and 2017. Should they give way, the next obvious target is the lower boundary of the red tramlines and that would be sub-parity in the $0.92 area.
The last time euro-dollar was at parity was 2002. The investment landscape was a very different place back then. Gold and commodities were just embarking on a multi-year bull market, as were emerging markets. The dollar itself was at the beginning of a bear market. Stocks were in decline after the dotcom bust. Interest rates were considerably higher than they are now.
President Donald Trump is not getting his way. He wants a weaker dollar, and has castigated Federal Reserve chief Jerome Powell for his lack of expansionary monetary policy.
https://moneyweek.com/currencies/600842/eur-usd-euro-slide-against-us-dollar