The Euro's Long Run Is Finally Over

By Jim Wiandt

The euro's long run is finally over.

While nothing is sure in markets, the tide appears to have turned for the dollar. It seems pretty clear that we're at one of those 5 or 10 year inflection points for currencies, and that there's been a definitive turn for the dollar. Even Goldman Sachs reversed course in its latest report, saying, according to today's Wall Street Journal (paid subscription required):

"We have changed our view and think the dollar has bottomed," Goldman Sachs said in a research report Thursday. "Until the end of the year the road may remain bumpy...but the underlying picture has turned much more dollar-positive."

This morning in Europe, it was sitting low $1.47. And you'd have thought, even with a reversal that the euro would have recovered a bit on some profit-taking. So it's feeling like a pretty definitive break.  I watch it very closely.

So there you have it. If there's one thing I've learned over the years, it's to put very little stock in that sort of report. They basically align projections after trends have reversed, and tend to be very cautious in the amount of movement. So I guess if you shouldn't listen to Goldman, certainly don't listen to me. But I think with the current feel of U.S. and European markets and a new U.S. administration coming into office that we're headed back to par in 3-5 years. I've been saying it for awhile, but was incredulous when the euro broke $1.50 (surely that was the top I said) and ran all the way to $1.60.

Some kind of jolt into the economy could still change things, but at this point it does feel like it would have to run against the long-term setup in the market.

What does it mean for your portfolio? Well, I'd be bearish on European equities and like the U.S. market in that paring, which may get the double stomach punch of weaker returns and a declining currency. Flows say that other investors are thinking the same way.

You never know with currency, but it's worth looking at and thinking about as you rebalance.  A lot of fundamental factors still do not favor the dollar, including huge current accounts and trading deficits, but the fundamentally weaker (and likely less resilient European economy) seem like they're trumping those factors and driving the turn.

Comments

[eh]

I wouldn't be so sure about that: at its current pace, the federal budget deficit will be over $1 trillion this fiscal year (although it probably won't reach that).

[hedgeman]

It is not over yet.


EURJPY 162.00, watch for daily close bellow. We should see a fast drop to 150 if that happens. In current conditions it is my belief that USDJPY will take more heat and this should stop (reverse) the rising USD. Long EURJPY positions (used as proxy long commodities) are relatively large and part of EURUSD selling was unwinding the EUR part of these position. The rise of USD happened much faster then anticapted and USDJPY is expensive longer term above 110.00. Providing defense of 162.00 is succesfull I do not exclude a rally to 115.00 but there the fun is defenitely over.

As for the EURUSD... it will take 2-3 quarters and final spike to 1.69 in 2009 (65.xx in USD index) before it will finally be over. Important levels (short term 1.4630), longer term 1.36-1.42 area will serve as accumulation area. Since momentum is extremely strong picking a bottom before we see a higher weekly close is not advisable.

[User 142738]

eh: The EU member countries can only wish that they could lower their collective government deficits to below $1,000,000,000,000.

[User 142738]

eh: The EU member countries can only wish that they could lower their collective government deficits to below $1,000,000,000,000.

[moneysurf]

As you said nothing is sure in the market!

[Matt from Queens]

Where was this article when the euro was 1.60? The euro stopped appreciating in April, so I don't even know why they published this.

[Jackson Cash]

tick... tick... tick... tick... tick... tick...

[Matt from Queens]

And in other timely news, the Boston Red Sox have won the 2007 World Series.

[Matt from Queens]

The Beatles broke up too.

[hammerman]

Don’t you think the dollar has been controlled buy the Bush administration all this time so that some of the loans that were coming due would be paid back at half there value and isn’t amazing how the possibility of the value of the dollar is going up and the cost of oil is coming down just a few months before the election. It must be magic or “Smoke and Mirrors”.

[CaptBob]

If you have a dozen fish and a fish-box-(ice cooler) that holds 10 you can be "fair" or smart.

If your fish --the dollar--is starting to stink you and rotate it into the box and take out the Euro fish which will then start to stink while your $ fish smells a little better.

This may have the appearance of fair management but your fish $-is just as rotten as it ever was and when you get to the dock none will be edible. Will you be better off being in the company of equal fools/losers cause they tried to help you??

You should have gone home with ten fish and asked the others for a small piece of their price. Just cause the Euro fish is starting to smell doesn't mean the dollar fish is any "Less" rotten.

[paultaut]

Its not smoke unless you mean the "fog of War". The Euro dropped because of Georgia which is literally in their backyard. The Dollar went up for that very same reason...a War Premium.

Other than that, the financials get reamed on the ARS scandal and the Minimum Wage phase 1 kicks in unnoticed. The dollars strenght will be relative to the Georgian conflict only.