Outlook for Euro

Readers Question: Now that we know the Euro is down to 1.29 USD, where do you see it going from here? (Predictions for Euro)

Back in October, I felt the Euro was looking a little overvalued because the Euro economy was starting to go into recession.

Since then, the Euro economy has deteriorated more sharply than anyone perhaps anticipated. Negative growth figures in Germany has been particularly disappointing. There have also been increasing concerns about the financial state of many of the periphery economies – Italy, Greece, Spain and Ireland in particular. For example, Italy has national debt of over 100% of GDP and has seen a sharp rise in bond yields on government debt.

It still remains to be seen how the ECB will react. Traditionally they have been ‘inflation hawks and it is hard to imagine the ECB (which is heavily influenced by the former German Bundesbank) agreeing to quantitative easing (increasing money supply)

However, at the very least Euro interest rates are likely to fall and combined with a sharp recession, this will pull the Euro lower. There will be no quick recovery for the Eurozone and I feel weakness of the Euro will continue.

If the Euro did fall, it would provide some relief to countries like Germany who rely so much on export revenue.

The dollar is difficult because it is being pulled in different directions. The quantitative easing of the Fed threatens to weaken the dollar. But, the dollar is still being seen as a relevant safe haven causing it to be relatively strong. I think the dollar could go either way.