1-EUR/USD has most recently conceded some of its new-found strength this year. Some are therefore questioning the euro’s new-found strength.
2-However, history and data show that the euro has, broadly speaking, performed well since its inception (in spite of euro skepticism).
3-The collapse of global interest rates this year has helped position the euro as an alternative to the U.S. dollar.
4-In the longer term, the euro still appears probably undervalued and could continue to appreciate, possibly even against USD (more so than it has).
I would not give up on EUR.
From its initial launch, the euro sold off aggressively. The euro has always been viewed with great skepticism, although its riskiness enabled the currency to rally into its peak above the 1.60 handle (coinciding with the Global Financial Crisis). Since then, euro skepticism has been strong. In 2020, however, EUR/USD has managed to break its long-term downward trend by reverting to the upside after the U.S. cut its short-term rate target to 0.00-0.25% (the ‘zero lower bound’).
From the chart above, we might think that the euro waxes and wanes as we would expect from all currencies and that no clear long-term trend (since inception) is discernible. Yet this is a myopic, dollar-focused view. While EUR/USD is the most liquid currency pair in the world (due to the sheer of trade; understandable given the size of the U.S. and European economies), the euro has more broadly been in a secular bull market.
Looking at the EURO’s Purchasing Power Parity Index ( ) since the creation of this stable currency. It is all rather impressive considering that the ECB maintains a negative deposit facility rate of -50 basis points, and where the German 10-year bund yields less than -60 basis points (at the time of writing: -62.8 bp ). Currencies such as the lira have collapsed, most prominently this year, and the lira is a good example because, in spite of its high short-term rate (its one-week repo is 10.25%), Turkey’s year-over-year is currently 11.75%. That is, based on the data that is available to us. In other words, it is a negative-yielding currency when you consider . The euro is also negative-yielding, but the negative deposit facility rate of -50 bp compares to deflation of -30 bp in October 2020. In other words, the euro is a higher-yielding currency than the lira in October 2020, after adjusting for .
The euro is not only less risky than the lira, but also a higher-yielding currency. It is no wonder that EUR/TRY is rallying. The euro also benefits from the broader nominal interest rate normalization this year to the zero lower bound. The spike in EUR/USD has consolidated the euro’s strength and ability to venture for higher levels still. While CHF remains strong as a EUR alternative and (even global) safe haven, the euro serves as a safe haven of sorts to currencies such as the lira.
I believe this alternative view is useful to traders because it shows that the euro is not the worst currency in the world to hold. In the new regime of effectively zero interest rates (based on the short-term targets of G10 central banks, at least), the euro still offers the potential for appreciation.
Looking forward, I would suggest not giving up on the euro just yet. The euro could continue to consolidate higher, and not just against high-risk currencies such as the lira. It is an alternative to the U.S. dollar.
Resourses: EU Centeral bank, Seeking Alpha Dot Com
These are not finacail advise and they could be wrong.
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