Tags: euro

A Case for the Comeback of the Euro

By Sean Hyman   |   Tuesday, 28 Apr 2009 03:38 PM

For the first time in a while, I see the start of a fundamental shift for the Eurozone. There are several factors causing this. Let's take a closer look at them.

The talk among the European central bankers is starting to change. For instance, over this past weekend, the European Central Bank's Nout Wellink is talking about a "floor for the benchmark interest rate." Others have stated that it may not be a wise move to take interest rates lower.

So, for the first time in a while we're seeing the European central bank members talking about halting the interest rate decreases. That's a first step in halting the fall of the euro.

Also, last weekend the Group of Seven (G-7) nations released a statement that said, "Economic activity should begin to recover later this year."

They went on to say that, "Recent data suggests that the pace of decline in our economies has slowed and some signs of stabilization are emerging."

This will give investors a sigh of relief and encourage them to "come back out of hiding" from within the dollar and yen and inch back into beaten-down currencies that have a huge chance for appreciation. The first place money usually runs to is the euro (nicknamed the anti-dollar). So, if money leaves the dollar (and I think it will), then the first stop is the euro.

The next change that I've begun to notice concern the sentiment indicators for the Eurozone (particularly Germany).

For example, the German ZEW economic sentiment indicator came in at negative 3.5 two months ago but was expected to come in at positive 1.8. However, it blew out those expectations by coming in at positive 13.

Another sentiment indicator complimented the ZEW. It's called the German Ifo report and it is a survey that has to do with the business climate. Two months ago, it came in at 82.2. This past month, it was expected to inch fractionally higher to 82.4. Yet it exceeded those expectations and came in at 83.7.

So, with the Eurozone being in such disarray and the sentiment numbers still coming in more bullish than expected, it becomes a huge vote of confidence going forward for the euro.

Lastly, we come to the final pieces of the puzzle which are the recent improvements in both the manufacturing and services numbers for Germany. These improvements, along with the stabilization of commodities, help to underpin the euro and stem its fall, too.

What does the stabilization of commodities have to do with the euro?

The EUR/USD pair is predominately driven by dollar flows. As the dollar declines, the EUR/USD rises and vice versa. As commodities rise, the dollar tends to become weighed down. Likewise, as commodities fall, the dollar rises.

If commodities have completed their decline, then it's only a matter of time before they turn upward and head higher once again. As that happens, the dollar will plummet and the euro will be one of the biggest beneficiaries of that slide-off.

For all these reasons, I believe that the euro has put in a floor around the 1.25 level to the dollar and that we will see it start to head higher in the months ahead.

For many, this will be a hard pill to swallow. After all, I hardly know of anyone who has been talking about the euro going higher in the months ahead. Almost everyone is betting on the rise of the dollar because of how well it has done in the past year. However, the dynamics that blessed the dollar with a good run last year are starting to change.

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For the first time in a while, I see the start of a fundamental shift for the Eurozone. There are several factors causing this. Let's take a closer look at them. The talk among the European central bankers is starting to change. For instance, over this past weekend, the...
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