Dire Consequences: Euro to Test Parity Against U.S. Dollar

Includes: ERO, EU, FXE, UDN, UUP
by: Ophir Chador

Royal Bank of Scotland is lowering its forecast for the euro against the US dollar, stating that the shared currency "can easily head through [dollar] parity." Unfortunately, the consequences of such a scenario jeopardize far more than the European Union's reputation alone.

Alan Ruskin, head of foreign-exchange strategy at RBS Securities, is revising his forecast for the EUR/USD to 1.14 by the middle of next year. However, a "hard landing" from the European debt crisis would put euro-to-dollar parity on the table. Mr. Ruskin adds that the key 1.1650 level for the currency pair may be tested by year's end.

As reported earlier, Deutsche Bank chief economist, Thomas Mayer, is also warning of the potential for euro parity against the US dollar. Mr. Mayer argues that continuing uncertainty surrounding Greece and other peripheral EU member states means that the euro "will remain under pressure" going forward. He adds, "I think we could soon see 1.20 against the dollar and a further decline in the direction of parity is definitely possible."

The problems that lay ahead for the eurozone have gone completely unaddressed thus far. Several EU member states will continue to face economic contractions in the months to years ahead. In several cases, those contractions will almost certainly turn violent as a result of austerity measures aimed at curbing sovereign debt burdens. Thus, the bailout package agreed upon last week among EU member states fails to address the key concern facing the trading bloc going forward: Economic growth; or, rather, lack thereof.

At this point, further significant weakening of the euro is bordering on certainty, as is continuing general strength for the US dollar. In and of itself, this tendency toward US dollar strength will prove extremely harmful for the US economy in the months ahead; it will negatively impact corporate earnings, exports, tourism and most every facet of the US economy. Indeed, the major achievement of the latest EU "bailout" package is to stop a global crisis from unfolding all at once, all the while ensuring that the global crisis drags on for years.

Disclosure: Author is Short EUR/USD