From the March 01, 2009 issue of Futures Magazine • Subscribe!

Euro underachiever

After recovering more than half of its losses in December from the bear move off of its all-time high, the euro is declining again, dropping from 147.19 on Dec. 19 to 127.02 on Feb. 2. “After that peak, the euro collapsed again,” says Joseph Trevisani, chief market analyst for FX Solutions LLC. However, as fear of a global economic meltdown abates, he says the currency will strengthen substantially. “When you remove fear, you are left with the comparison between the dollar and the euro, the ECB and the Fed, and the Euro zone and the United States’ economy,” he says. He expects the euro to be range bound but drift up to between 127 and 132.

Antonio J. Fernandes Sousa, chief strategist for DailyFX, is bearish. He says risk aversion continues to hurt the currency, as does the reticence of the European Central Bank to cut rates and spur growth, which it must do soon, he says. “That implies a big shift in yield differentials in favor of the dollar and against the euro; and that’s still not priced in,” he says.

The biggest problem is that the ECB doesn’t target growth, leaving individual countries to manage on their own. And with big discrepancies between strong countries like Germany and countries like Spain, Portugal and Greece, which have much weaker debt ratings, the euro zone itself is under great strain, he says.

Sousa says the euro will test 125, bounce, and then retreat to 120 in March.

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