Is There Any Hope for the EUR to USD?
Judging by comments from Europe’s highest officials, the euro to dollar exchange rate is all but guaranteed a crash in 2016. The EUR to USD is already showing signs of strain this year, and it may not be long before the house of cards comes tumbling down.
This trend actually started months ago, but it was momentarily interrupted. From mid-October to early December markets were driving down the euro in anticipation of central bank actions.
Nearly everyone expected the Federal Reserve to raise interest rates, while the European Central Bank (ECB) looked to be headed in the opposite direction. Investors predicted a rate cut from ECB President Mario Draghi.
Naturally, that equation meant huge losses for European consumers. Lower interest rates are designed to devalue the local currency as a way of boosting exports.
Markets began to price in that information, pushing down the EUR to USD by 7.5% in about six weeks. But then Mario Draghi failed to deliver what he promised.
Mario Draghi Faces Pressure to Devalue the Euro
Most analysts, myself included, thought the ECB would cut interest rates by about 0.25% and dramatically increase its bond buying. Instead, all we got was a 0.10% drop and a timid commitment to increase asset purchases. It was weak. (Source: ECB Day: markets tumble as Draghi disappoints investors – as it happened,” The Guardian, December 3, 2015.)
The EUR to USD bounced back.
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Meanwhile, the Federal Reserve actually followed through with its promises. The Fed raised interest rates by the expected amount, making for a smooth normalization period.
At that point, the euro should have dropped a little further because the relative value of the dollar had gotten stronger, but nothing happened. Draghi and the ECB had effectively broken the market.
But I wasn’t so sure his strategy would work. Believe it or not, trust is a very important factor in good central banking, so losing the faith of markets jeopardized Draghi’s attempt to rescue the European economy.
Maybe he thought the Fed’s rate hike, when coupled with his promise “to do whatever is needed,” would be enough to drive down the euro to dollar exchange rate. But it wasn’t.
His implicit trust was no longer good enough to pacify investors. They were desperate for some monetary stimulus and only a big hit of quantitative easing would satisfy their craving.
Euro to Dollar Forecast for 2016
Now Draghi is changing his tune. The European economy posted some pitiful results and the threat of a slowdown in China is further depressing investors’ growth expectations. Circumstance is forcing his hand.
At a press conference this past week, Draghi said the ECB would likely have to, “review and possibly reconsider our monetary-policy stance at our next meeting in early March.” (Source: “U.S. Dollar Advances Against the Euro,” The Wall Street Journal, January 21, 2016.)
There’s no mystery to what he means. It may sound like just another generic, offhand comment to the untrained ear, but I’m pretty fluent in “monetary speak.”
Draghi is acknowledging his previous mistakes and trying to assure markets that he can do what is necessary. He knows his political capital is running low, so expect a completion of the earlier rate cut at the next ECB meeting.
Like I’ve said many times before, the coming collapse of the euro to dollar exchange is by design of the ECB and Mario Draghi.