Is EUR/USD Parity Inevitable?

Reading this article in the WSJ “Hedge Funds Try ‘Career Trade’ Against Euro“, it would seem that there is an increasing amount of investors, especially hedge funds, looking for the EUR to fall to parity against the USD.  It is hard to believe that only a few months ago it looked as though the EUR was heading back towards its previous highs around 1.60 hit in April 2008. 

Following the surge in the USD during the financial crisis EUR/USD dropped to below 1.25 in November 2008 and then managed to eek out some gains as risk appetite improved and the USD came under pressure during most of 2009.

The picture towards the end of 2009 reversed as initially investors covered short USD positions and then bought USDs on rising risk aversion and growing problems in Greece.  The trend looks well set now and a move even lower beckons for EUR/USD.  

So how low will it go?  It is tempting to say that record short speculative positioning in EUR/USD means that the market is already stretched and like an elastic band pulled too far the EUR could rebound sharply.  On the other hand the band could also snap and in the case of EUR/USD this would imply a collapse in the currency as other investors join the bandwagon of selling EUR.

It is difficult to see any quick resolution to the problems in Europe at present.  Growing social/ labour unrest in the wake of austerity measures to cut burgeoning fiscal deficits highlight that implementing budget cuts mean tough political choices.   Greece has borne the brunt of this unrest but it appears to be spreading across Europe.   

In the past countries could devalue their way out of their debt problems but this solution is not available to individual countries in the eurozone.  Another option is to inflate your way out of the debt but again this is something that the European Central Bank (ECB) will not tolerate and could do much greater long term damage.  

So the only viable solution is to cut spending, raise taxes, implement reforms and raise retirement ages, all of which will fuel plenty of tensions in the countries concerned.  The difficulty of raising taxes was highlighted by the fact that even Greek tax inspectors have gone on strike, a fact which makes a mockery out of the government’s plans.  

Assuming that austerity measures are actually carried out it will mean that growth in Greece and many of the other bigger countries in Europe that carry out these measures will weaken further, making a “double-dip” scenario for the eurozone economy more likely.  

The bottom line is that it is extremely difficult to see the EUR make a sustainable recovery against this background.  Yes, the market is positioned short but so what? We may see short positioning increase further before any stability in the EUR is achieved.   

The last time EUR/USD was at parity was in December 2002.  Given the lack of alternatives in Europe at present another test of parity does not look as inconceivable as it did only a few months ago.

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One Response to “Is EUR/USD Parity Inevitable?”

  1. gordan Finch Says:

    The Euro currency rate stands massively overvalued against the GB Pound the US Dollar and other major currencies, and its impact is being felt by manufacturers desperate to export. But who are shackled with increased cost of raw material, in an overpriced uncompetitive European Union environment, that compounds the difficulties. Also its widely known now the Euro is being overvalued, with the intention of replacing the US Dollar. But business leaders, and the general public, know the debts of Europe, cannot be paid off, and the cracks are now showing. The European Central Banks last desperate attempts of a Euro, as the major currency is now history. More probable now is the GB Pound, which has remained stable even with Mervyn Kings silent devaluation which markets know will reverse very quickly over the winter. Or the German Deutsche Mark, as it shifts away from the European Union, now more likely.
    The other issue regarding the Euro is fraud; this is normal business in many European countries. Also there is a mentality that debts are never paid, like Tax, which few pay anyway. Cash is the king in the EU and most businesses participate with vigour.
    Recent increases in IVA are destroying any hope of businesses competing in export markets. And this has increased cash transactions, which are now regarded by the Public as normal. The consequences of this and many other failings within the European Union are a Devaluation of the Currency to parity with the US Dollar now a clear prospect.
    Gordan Finch.


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