The strength in the Euro over the last few weeks has surprised many. Euro strength has certainly defied the bears but for how much longer? The euro is currently trading at 1.3340 just 3 cents below its 52 week high against the US dollar. Even as political crises have intensified in Greece, Portugal and Spain, the Euro has edged higher against the US dollar. Economic data in Europe has started to show some green shoots of recovery with powerhouse Germany leading the way but the continent is far behind the US yet the currency remains strong and has been getting stronger over the last few weeks. Mario Draghi, the President of the ECB (European Central Bank) has recently introduced “forward guidance” saying that interest rates would remain at current or lower levels for an extended period of time. Yet the currency has strengthened since!
However, there is some explanation of the strength – the Eurozone has a current account surplus due to fiscal austerity hitting domestic demand. The Euro has benefited from the sell-off in emerging markets and the fall in currencies of deficit countries – India for example. Amongst the majors, Sterling and the Australian dollar have weakened due to their deficits. There is increased confidence in the Eurozone when compared with a year ago but with unemployment at record highs in number of countries and with more than 50% of under 30 year olds in Greece, Portugal and Spain without jobs, the economic situation is still in a weak position. The Euro has been seen as a safe haven currency rather than the US dollar and that is another reason why there has been strength recently. The Euro’s relative strength has also been due to the challenges being priced in.
However, from a purchasing power point of view the Euro does seem rather over-valued compared with the US dollar and no doubt the market will take notice. But when is the correction going to take place? Cannot be far away!