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July 19, 2005

Bullish On The Euro

If the decline in the euro has been good news for the German economy, as suggested in the article cited in my previous post, I guess this story from Reuters is bad news:

Some analysts feel that short-term factors rather than fundamentals have driven the euro's rapid fall this year, and the euro could still head back to record levels...

Analysts use various technical models to calculate a currency's fair value but they are based on similar variables including differences in economic growth, interest rates, inflation, productivity, investments, terms of trade and equity prices...

In case you are wondering what fair value means, I think the answer is something like "long-run equilibrium value":

Fair value, or the value to which a currency should adjust to over time, is used by companies making long-term investments overseas that need to hedge against currency swings.

So where does "fair value" take us?

Goldman sees the euro back at $1.30 in 12 months' time on concerns that the United States may find it difficult to attract enough investment to offset its gaping trade deficit -- at record levels as U.S. consumers snap up cheap imported goods.

"Real economy adjustments are relatively slow to filter through. And that's where the disconnect between fair value and current account deficit comes in," Stolper said. "The United States is still importing like crazy, creating a large imbalance."

A caveat:  Be wary of any article that confuses movements along demand curves with shifts in demand curves:

The euro could also recover as central banks, particularly those in oil-rich nations, start buying euros again at more attractive levels to diversify their reserves.

That one can't be blamed on the Goldman gang, of course, so judge for yourself.

July 19, 2005 in Europe , Exchange Rates and the Dollar | Permalink


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Lest i wasn't catching on an unexpected gem of irony (here I'm being sarcastic myself), I wonder what the hell is that "radioactive based" model (lol) that Goldman allegedly uses to predict fair value (was it fair value or expected/forecast value, I forget).

Posted by: Fedward Hyde | July 19, 2005 at 06:29 PM

I'm doubtful that the euro will recover much. The three main reasons that the dollar fell, are being addressed heavily; The trade balance, The Fed deficit, and interest rates. I just posted something on my blog abou this. I'm looking for a long-term move to the downside of the euro. I don't think that diversification for central banks will be enough to push the euro higher.

Posted by: David Andrew Taylor | July 20, 2005 at 10:38 AM

I am confused. What weak Euro? The Euro is 20% higher than parity with the dollar. When the dollar was 20% stronger than parity, all the analysts said parity was the most likely ending spot for the two.

I live in Berlin. Water costs 10 times more than water in, say, Texas. Gas costs 3 times as much. An oil change costs 60 Euros ($70). To put out a bag of leaves, the gov't charges around $3 to take it.
I could go on but you get the point.
Whoever told you the Euro was weak was a misinformer.

Posted by: fuggywater | July 26, 2005 at 10:49 AM

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