The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us something. Dominic Frisby explains what it is.

The euro is in a bear market against the US dollar
(Image credit: Getty Images/Tetra images RF)

Rhodium is breaking out to new highs above $12,000. Palladium looks equally unstoppable. Gold is now above $1,600. Stocks dipped, as the 30-year US long bond yield slipped below 2%. Bitcoin is back above $10,000. That was just yesterday.

There’s a lot to talk about in today’s Money Morning, but something has caught my eye in recent weeks that I don’t see gaining such widespread coverage, even though it is a far bigger market. That is the collapse of the euro.

The euro has been in a bear market against the dollar since early 2018

You can trace the current bear market in the euro against the US dollar all the way back to early 2018. But the latest leg down only got started on New Year’s Eve, since when it has fallen off the proverbial cliff. It might be Brexit. It might be something else. Who knows? But the euro’s prospects versus the dollar is the subject of today’s Money Morning.

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Currency markets tell their own little story, often a political one, and the falling euro is telling us something. Here is EURUSD since mid-December 2019, so you can see the drop I’m referring to – from $1.12 to $1.07.

On a long-term chart, of course, it’s just a blip. Here we see the currency pair since the year 2000.

The first eight years of this century – in other words, until the global financial crisis – were the great ones for the currency of the European Union. It almost doubled against the dollar, which is extraordinary for a major currency, going from a low of $0.82 in 2000 to a high of $1.60 in 2008. Since then the euro has been in decline - or the dollar has been strengthening, depending on your point of view.

These are by some margin the largest two currencies in the world. Between them they account for more than 80% of foreign exchange reserves. EUR/USD is the most traded pair in the biggest market in the world. It’s quite easy to make the case that this is the most important price in the world.

I’ve drawn some tramlines on the chart above around the price since 2008, because there is such an obvious and clearly defined trend there. My first observation is just how long these trends in forex can go on for. This bear market has been going on for over ten years. But within that secular bear market there have been substantial counter-trend rallies that have gone on for a year or more.

In 2009, for example; from mid-2010 to mid-2011; from mid-2012 to mid-2014; and in 2017. Get on the right side of those rallies, and you made a lot of money. But the broader trend, nevertheless, has been down.

Don’t bet against the trend – and the trend for the euro is lower

Today we sit at $1.07, having been at $1.12 on New Year’s Eve. US dollar strength has been the main driver of the move, but the euro has been weak against all major currencies – the Japanese yen, the British pound, the Swiss franc, the Canadian dollar – you name it.

Put simply, the current trend is quite clear and, within it, the euro is breaking to new lows. New lows tend to lead to more new lows and the best way to approach them is to sell them.

The $1.03-$1.05 areas are the obvious first target areas – the lows of 2015 and 2017. Should they give way, the next obvious target is the lower boundary of the red tramlines and that would be sub-parity in the $0.92 area.

The last time euro-dollar was at parity was 2002. The investment landscape was a very different place back then. Gold and commodities were just embarking on a multi-year bull market, as were emerging markets. The dollar itself was at the beginning of a bear market. Stocks were in decline after the dotcom bust. Interest rates were considerably higher than they are now.

President Donald Trump is not getting his way. He wants a weaker dollar, and has castigated Federal Reserve chief Jerome Powell for his lack of expansionary monetary policy.

Maybe that will change. Maybe the fact that I am even writing this article and discussing the possibility of EUR/USD parity is in itself a contrarian indicator and the market is about to turn up.

But I am short the euro. We got a sell signal earlier in the year, which I wrote about on these pages, and I will stay short until we get a buy signal. I’ll probably move stops up as $1.03 approaches, in order to protect gains, but this one looks like it’s headed lower.

What does this mean for the eurozone? Its exports are getting cheaper. Its assets are getting cheaper. The relative purchasing power of its people is declining. The European Central Bank’s more expansionary monetary policy (relative to the Fed) is working.

But the bottom line: capital is moving to the US, whether it’s to buy US stocks, bonds or just its currency. The majority is selling euros and buying dollars. The long-, mid- and short-term trends are all down. Don’t make the trend your enemy.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here.

Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is, we think, the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. 

His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government. 

Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art. You can follow him on X @dominicfrisby