Has Shorting the Euro Become Lethal?

For the longest time, it seems, shorting the euro was a sure fire winner. The European Central Bank was late getting on board with quantitative easing and as the US Federal Reserve started raising rates many banks in the EU offered negative interest rates. It made sense to borrow Euros, convert them and invest elsewhere and it made sense to short the euro against the dollar and other currencies. Then things changed and this strategy did not work so well. Bloomberg discusses how going short on the euro has proved lethal.

Hedge funds. Asset managers. Central banks. These are just some of the players in the $5.1 trillion-a-day currency market who are buying the euro after shunning it over the past three years.

The shared currency has snapped its losing streak to become the best performer among Group-of-10 peers in 2017. After plunging to a 14-year low in January, the currency has staged a stunning comeback, rising to $1.1910 on Aug. 2, a level not seen since January 2015.

The euro may well rise another 10 percent against the dollar by the end of the year due to Europe’s success and problems affecting the greenback across the pond.

Dollar Falls as Euro Rises

We have written about how the options market predicts a falling dollar and the political chaos affecting US governance and the currency.

The fundamentals that drive the strength of a currency include the political and monetary policy of a country. They include the strength of the economy, balance of payments and interest rates. The US economy has climbed out of the Great Recession and unemployment is at historic lows. The stock market just keeps going up. But the dollar is headed the other way and is at an 11 month low. A major factor in the lowering dollar is perception of the direction of the US government and in fact the competence of its leaders.

The Europeans have gotten their act together and are still climbing rather nicely out of the hole of the Great Recession. The USA was out and clear and now seems to be spinning its wheels as politics and an unpredictable leader hamstring the government.

People have been hopeful that once Trump sat down in the oval office he would come to realize how much help he needs to do the job. And the hope continued in the belief that the generals surrounding Trump would guide him along a rational path beneficial to the country and the Western Alliance. That does not appear to be happening as world leaders, and Forex traders, parse the president’s random tweets and worry that chaos will ensue. The US dollar is a victim of this situation.

Thus going long on the euro is the order of the day while it is time to short the dollar. How long will this situation last? Barring some disaster in Europe the euro will continue to rise. The dollar is currently held hostage to the chaos on the White House and the inability of congress to work together to govern effectively.