A little song of Euro/Dollar…

To some, it’s money… As to me, it’s the leverage that prevents Europe from going to another great war.” Obviously, I’m talking about Euro. Today, instead of TRY, I intend to give you some insight into the relationship between the European and the US currency.

When Euro was first introduced, I predicted ‘something about Euro’ that would take years to become a reality: “It will come back to its initial value, sooner or later.” If my memory serves me right, the parity was standing somewhere around 0.89 when Euro was first adopted, then it hit above 1.60. I remember that day when I bumped into an exporter at the airport. He had told me that “Eurozone is pretty strong. It will make us all forget about the Dollar. You’ll see!” In response, I said that it’s not easy to end dollar, reminding him of the fact that some currencies are no longer in high demand even though they’re more valuable than dollar”. And I added, “If we wait long enough, everything will track back to its origins”

It must have been 15 years since I chatted with that man. Although the things our exporter friend said seemed like they were coming true at first, given the financial crisis of 2007–2008 and other financial turmoil, everything went actually back to the beginning. First the EU entered a crisis period, and then European Countries started to face political crises, one by one. Lastly, UK said that they do no longer wish to be a part of the EU.

I set forth the argument that every type of monetary mechanism which is not sustained by a solid decision-making mechanism is doomed to face disasters, sooner rather than later” It also seemed pretty irrational to me that a Eurozone with neither a Finance mechanism nor Treasury was trusted with the task of managing its own money. They were expecting that the power of the ECB would be enough to handle all. But, I’ve got to hand it to them; European Union is still standing as one of the most successful political projects in history despite all of the difficulties it is facing. The EU seems much more promising than the US as it is, in terms of capitalism and liberalism.

The US still has an income around $20 trillion against $12 trillion wealth of the Eurozone. The US is stronger in terms of GDP growth, inflation and unemployment, but as for the exportation, the US falls way behind the Eurozone. EU countries, however, are facing serious risks. Germany and France, two largest economies of the EU, are struggling with financial problems. So, I still stand by my comments about the euro I made 15 years ago from today. There is every likelihood that Euro can go back to its original value.

We’ll see whether Euro will go back to its origins…”

Exchange rate EUR to USD had suffered its first sharp fall 10 years ago. In a period between November 2009 and June 2010, it fell from 1.50 to 1.19. I remember that back then nations were highly hopeful about pulling themselves out of global financial crisis. While the United States and China have been the first to improve their economies, Europe was still struggling with crisis. Markets getting their hopes up about the ECB’s rescue plan would make the parity closer to 1.50 again until 2011.

From that day forth, a long-running story of resistance would last until 2014. During that period, exchange rate EUR to USD fluctuated within a pretty wide band of 1.50-1.22-1.40, until it suffered another sharp fall similar to the one in 2009-2010.

Exchange rate EUR to USD, which started its one-year steady downward trend in May 2014-a period of great progress for the world trade, was only able to stop at a level of 1.04-1.05 in 2015. The real trouble began afterwards, mutilating the parity in 1.15 until July 2017. With contradictory comments about the US economy reaching a peak, in 2018, the parity would rise above 1.20. Back then, I had made the following statement about that sudden ascent, “Not because European economy is doing well, but because the US economy is falling down”

But then, United States economy suddenly began to show signs of improvement. Dollar started to appreciate again as Fed was hiking rates and reducing balance sheet. But this time, it was about the significant improvement in the US economy. We’ll see dollar continue to gain value as long as the improvement doesn’t stop.

As I observe this graphic from a certain distance, I can see that the plateau of exchange rate EUR to USD is falling one step lower with each passing quarter. Therefore, it looks like EUR/USD will continue its journey, first at 1.05-1.10, unless something changes.

Nevertheless, the upcoming US presidential elections and the Brexit issue should be taken into account as well. I guess we’ll just have to wait and see.