What’s Next for the EUR/USD?
What’s Next for the EUR/USD?
For the past three years, Americans have watched in shock and horror as their currency fell increasingly far behind the Euro, an upstart currency that seemed destined to supplant the greenback as the prime world currency. Indeed, some Europeans had even been clamouring for a reexamination of the status of the US dollar as a global reference currency for the international finance community, as established under the Bretton Woods agreements signed by the G8 after the Second World War.But now it appears as though the trend is reversing itself. A number of factors related to the current financial crisis appear to strengthen this reversal.
US investors, shaken by the subprime crisis and unable to borrow as liberally as in the past,
are pulling their money out of investments in Europe and developing countries and bringing them home, converting them back to dollars.The US, as a federal government, is also expected to be able to address the crisis more coherently than the fragmented EU, which shares a currency but not a government or a policy-making apparatus. Add to this the global fear of risk, and investors from all over the world are running to US Treasury Bills as a source of shelter in bad times. In doing so, they also convert their local currencies to dollars.
The US economy recovered far faster than Europe from economic downturns in the previous half century, and many assume that will be the case this time around as well. This means that what little investment capital now exists is headed for the states, an additional source of upward pressure on the value of the dollar against the Euro.
It may seem unfair that a crisis which originated in the USA should strengthen the dollar against other world currencies, but for the foreseeable future, that does appear to be the outlook.
Currency traders and individuals with holdings in multiple currencies should factor in this projection when determining their positions for the coming years.
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