EUR to USD: Is the Euro to Dollar Exchange Rate Due for a Correction?

EUR to USDEuro to Dollar Exchange Rate Forecast

The euro to dollar is coming to its breaking point. There’s a treasure trove of data that points to the EUR to USD exchange rate hitting parity, but all you need to know is this: the more money a central bank prints, the more it devalues the currency. Once you know that, figuring out the direction of exchange rates becomes much easier.

We live in an era where central banks are hyperactive. They are constantly seeking out new ways to boost their economies and the effects are as plain as day.

After the 2008 financial crisis, there was a pretty clear difference in how the United States and Europe approached their respective economic troubles.

The Federal Reserve, America’s central bank, was aggressive. It printed tens of billions of dollars every month and slashed interest rates to near zero.

The European Central Bank was far less ambitious in its efforts, so we effectively got a very clear look at what the effects of central banking are in the real world.

The results were shocking. Between November 2008 and November 2009, the EUR to USD index spiked from $1.30 to $1.51. The euro had strengthened against the dollar by 16.2% and it was abundantly clear why: the Fed devalued its currency.

This situation was flipped around in the middle of 2014, when the Federal Reserve started to taper its bond purchases. The Fed’s stimulus had (kind of) worked. It kept the economy from falling into a deeper slump, while Europe stagnated.

Several eurozone countries (I’m looking at you Greece) kept teetering on the edge of bankruptcy. As you can imagine, the creditors of those countries weren’t too happy about that. They imposed massive austerity measures on Greece to get its citizens and its government to tighten their belts.

But there was just one problem with that. By tightening their belts, the Greeks, Spaniards, and Portuguese had to stop buying all the stuff that Germany was manufacturing. Demand plummeted and the eurozone continued its death spiral.

Things got so bad that the European Central Bank couldn’t ignore it anymore. It started printing tens of billions of euros every month for bond purchases and it cut rates to near zero. Sound familiar? It’s exactly what the Federal Reserve did.

So we’re sitting in the exact opposite situation than six years ago. The Fed and the ECB have swapped positions, making the ECB the one devaluing its currency. From May 2014 to today, the EUR to USD index fell by approximately 18%.

And it’s not going to end anytime soon. The ECB just increased its stimulus package last month. Barring any short-term fluctuations, I expect this trend to continue for the next nine months at least, with the euro to dollar reaching parity sometime before the end of 2016. (Source: “Markets lose faith in the ECB as mass stimulus measures falter,” The Telegraph, March 10, 2016.)