Any Hope for the EUR to USD?
When I look at the euro to dollar exchange rate these days, an old phrase comes to mind: “We must substitute courage for caution.” Those words were spoken decades ago, but they have just as much meaning when applied today.
First off, let me remind you that the EUR to USD is down more than 21% over the last two years. It is only the beginning. We’re likely going to see the euro crash in the coming months, and it all relates to a lack of courage.
I’m talking, of course, about the lack of courage in the European Central Bank (ECB). There was a sliver of opportunity after the financial meltdown of 2008, a moment in time when central banks had the opportunity to save their crumbling economies.
The U.S. Federal Reserve threw caution to the wind (too much so for some people’s liking) by launching a massive stimulus program. On the other hand, the ECB opted for half-measures. They chose caution over courage.
A few years later, we’re seeing the effects of those decisions play out. The U.S. economy is weak, but it’s a heck of a lot better than Europe’s. We can only sit here comfortably and say that because of the Federal Reserve. Love them or hate them, Bernanke did what needed to be done. The knuckleheads at the ECB did not.
They “acted responsibly” and then paid dearly for it. It was only after Greece, Italy, Portugal, and Ireland almost defaulted on their debt that Mario Draghi said he’d do “whatever was necessary.” He was implying that the ECB would undertake Federal Reserve-style stimulus if needed. The euro rose when he said that.
Let’s break that down for a second. The whole point of monetary stimulus is to boost exports and borrowing. Central bankers achieve that effect through interest rates and asset purchases. They deliberately weaken their currency.
I remember wondering why the euro was rising when Draghi had just committed to slashing its value. None of it made any sense. Markets were rewarding him because they thought his promise of stimulus would save Europe’s flailing economy. (Source: “Euro strengthens broadly after Draghi comments,” Investors.com, July 26, 2012.)
How wrong they were. His caution came back to haunt him last year as the Federal Reserve finally ended its quantitative easing (QE) program. Once again, Draghi said the ECB would do anything and everything to save the eurozone, but this time, markets took him at face value. (Source: “Euro weakens after dovish Draghi comments,” MarketWatch, November 20, 2015.)
They realized his promise of stimulus would devalue the euro, but it wouldn’t save the eurozone. All we have to do is bet on the dollar and wait for the European economy to crumble.