EUR/USD: There’s No Hiding from a Euro to Dollar Collapse

Euro to DollarEuro to Dollar Outlook for 2016

Figuring out where the euro to dollar exchange rate is headed in 2016 can be tricky, since much of the news is focused on conflict and drama. In turbulent times of geopolitical strife, important issues about economics get pushed into the backdrop of our perception, and that makes forecasting the EUR/USD pair difficult.

Forex is a tricky business. Most people try to outmaneuver the market with “fool-proof” systems, the existence of which I remain skeptical. However, there’s always the old-fashioned method of looking at basic fundamentals to figure out what’s actually driving the price movements. It’s not flashy, but at least it’s dependable.

So let’s recap what’s taken place on either side of the pond this year: Europe fell into chaos beginning with an upset in the Greek election, followed by a Greek debt default, and underlaid with anemic growth across the common currency area. (Source: “Crisis after crisis: Europe’s 2015 rollercoaster ride,” BBC, December 29, 2015.)

By contrast, the U.S. dollar was full of sunshine and roses. Kidding aside, the U.S. dollar posted a strong enough recovery in 2015 to justify a rate hike from the Federal Reserve. While I would still caution against excessive optimism on the American economy, there’s little question as to the fate of the EUR/USD pair.

The Federal Reserve Doomed the EUR to USD Outlook

The Federal Reserve dealt the euro a fatal blow by raising the federal fund rate this month. This was more than an all-okay signal from the central bank; it was a move with practical implications for the markets. Higher rates mean investors can get a more attractive yield on this side of the pond, which could drive demand for U.S. dollar-denominated assets. (Source: “The Fed moves – but what’s next?,” CNBC, December 17, 2015.)

Since no one wants to be the last one out of a burning theater, people rush for the exits when they see others running. In this case, the burning theater is the euro.

A rate hike was the long-awaited signal that America and Europe had truly diverged in the post-crisis era. One had managed a full (albeit, tepid) recovery, while the other tried desperately to avoid ruin. That’s why owning U.S. dollar-based bonds could end up being a great idea.

It could be one of those great cul-de-sac investments that reap huge benefits for the people on the inside, while decimating those on the outside. By that I mean that higher yields can draw in enough investors to bump up the U.S. dollar, which in turn increases the returns on American assets.

So the fire is set. I see a drop coming in the euro to dollar exchange rate and that could precipitate a rush towards U.S. dollar assets. You don’t need an MBA to figure out that getting there first means profiting from a stronger U.S. dollar as well, which is why the burning theater analogy kicks in.

EUR/USD Woes Continue

As the EUR to USD exchange rate skews towards the dollar, more investors will make the leap westward to avoid getting hammered by currency risk. This is just common sense, but many investors will miss it, as they try to come up with a “get rich quick” scheme.

But like I said, there aren’t that many people willing to look at the fundamentals and game out a logical progression of the facts. They simply look around and see what others around them are doing. But as far as the facts go, they speak plainly: the euro is trending downward, while the dollar is headed skyward. Oh, how history repeats itself.