What’s Next for the Euro?
Despite a few days of relative strength in the EURUSD exchange rate, investors should be wary of false positives. The euro to dollar outlook for 2016 will likely dissipate as investors come to grips with the dire reality of the situation.
The two continents stand a world apart in their economic health. The U.S. dollar was battered by years of low interest rates—that much is a fact. But those years were crucial to the recovery of America’s economy, whereas Europe squandered its time with half-measures and interstate squabbles.
Who can forget the sovereign debt crisis in 2011 and 2012? Greece, Italy, Portugal, and Spain all saw their costs of borrowing rise above seven percent. The situation was only saved by Germany’s strong manufacturing sector and a weak U.S. dollar.
It’s safe to say those low interest rates kept the world’s currency markets in balance, which is partly why the Federal Reserve was so cautious in raising rates.
But the rate hike has now come and gone. It happened. It’s done. A strong U.S. dollar is a foregone conclusion in most currency markets (Canadian dollar, Chinese yuan, etc.), but the EUR to USD currency pairing remains oddly resilient. Let’s take a closer look at what’s going on.
U.S. Dollar Set to Appreciate Against the Euro
Even if there was cause to doubt the Federal Reserve’s timing, any Monday morning quarterbacking was swept aside when we learned that the U.S. economy added 292,000 jobs in December. The rise in nonfarm payrolls vindicated what a long line of analysts (myself included) were saying would happen. (Source: “Employment, Hours, and Earnings from the Current Employment Statistics survey,” Bureau of Labor Statistics, last accessed January 11, 2016.)
We said the U.S. economy had long since outgrown the central bank’s monetary stimulus and we were right. Credible fear of higher interest rates drove short-term investments that led to increased hiring. It didn’t take a fancy MBA to see it coming.
By contrast, Europe was stagnating. Anyone who thinks otherwise is clearly turning a blind eye towards the Greece fiasco, which dominated headlines for the first half of 2015. A eurozone nation defaulted on its debt, highlighting once again why the currency union is broken. (Source: “Europe set for a fundamental clash of ideas,” BBC, January 1, 2016.)
Greece didn’t have the authority to print more money, even though it needed the extra liquidity. The continent has a monetary union, but not a political one. Until now, most investors were willing to brush that aside, but it can’t be ignored any longer.
Yes, Greece ultimately reached a deal with its European creditors, but only by agreeing to more painful austerity measures. Whether or not you think austerity is a good idea, its basic tenet is for both the government and people to tighten their belts.
Less spending in Greece (and other periphery countries) means less money in the pockets of those who sell to Greeks. Who are these sellers? Oh, wait; it’s the Germans.
Euro to Dollar Outlook for 2016
By forcing austerity on countries like Greece, the eurozone shot German manufacturing in the foot. Then there was the Volkswagen AG “Dieselgate” scandal, which decimated all trust in the company, striking another blow to famous German exporters. (Source: “Germany’s year: Has it been worrying or wunderbar?” BBC, December 30, 2015.)
And on top of all that, the refugee crisis is stirring a lot of xenophobia and tension into European politics. When such divisive issues take center stage in a democracy, more important ones about the economy slip between the cracks.
So to sum it up, we have an American economy recovering at a modest pace and a eurozone economy on life support, meaning the euro to dollar outlook isn’t great. Is it any wonder I’m expecting a crash in the euro?