Many commentators feel that the Euro is looking overvalued against the dollar and Pound.On the futures market a majority of investors have taken a ‘short position’ on the Euro – meaning they expect it to fall in the coming months.
- Since 2007, the Euro has appreciated from 68p to 1 Euro to 96p to 1 Euro
- The Euro has appreciated from 0.68 to 1 Dollar to 0.79 $ to 1 Euro, in the past few months
In recent months the Euro has been strong as the ECB have kept interest rates higher than the UK and US. The ECB have also tried to avoid any quantitative easing – or increasing the money supply. It was hoped that the Eurozone would avoid the worst of the recession because it did not have the same banking / financial problems. However, this hope has not materialised growth in many European countries has become negative as the global nature of the recession has hit exports hard.
ECB Interest rates
ECB interest rates were cut from 2.% to 1.5%. However, many feel that ECB rates will fall further to US / UK levels making the Euro less attractive. If the recession deepens there is even the possibility of the ECB pursuing some form of quantitative easing.
The fall in ECB interest rates will weaken the Euro.
Markets are also concerned at the high levels of government debt in countries like Italy, Greece and Ireland.
According to the Big Mac index, the Euro is 50% overvalued against the dollar. link