Risk aversion and interest rate compression are crushing the euro, and because money typically pours into the lowest yielding currencies in a recession, the damage is likely to continue. “Everyone is piling into the two lowest yielding currencies: the dollar and the yen,” says Kathy Lien, research director for GFT Forex. She adds that the European Central Bank will need to take interest rates below 3% before Christmas; in early November, rates were 3.25%.
“Everyone is slowing, everyone is lowering,” she says. Upside potential is 1.33, she says, but more likely, the euro will find support at 123.30, the low from two years ago.
Ken Lazzara, head dealer for Easy Forex US Ltd. says the logistics of fund liquidation are largely responsible for the dollar’s strength against the euro. However, the fact that the Bank of England cut rates 150 basis points to 3% in early November is an indication that the rest of the world is far behind the curve in addressing the global slow down. “Those are 1954 levels,” Lazzara says. “They are defending the pound in the same way they were after WWII. You stop and think about that and what was going on then and it really set me back in my chair. Are things that bad economically? Apparently they are.” He says support is at 1.23 and he expects to test 1.21.