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posted on 18 May 2015

The Euro: What Is Next?

Written by , GEI Associate

The Euro has been declining for an extended period of time now, however, many experts have concluded very different things as to what its path may lead to in the next few months, as well as years. As of today, the Euro is equivalent to $1.14, which is astoundingly less than the exchange rate of merely a year ago, which was approximately $1.37 to the Euro. The current inflation rate is 1.5%.

The Euro is a currency that has definitely fluctuated quite a bit over its history, but it is also quite a young currency, so that would have a significant effect on that; furthermore the different collapses external to public policy also have had great effects on the value of the currency. However, since 2002, the value for the currency has increased quite steadily.

In March of just this year, Goldman Sachs and HSBC have had quite contrasting views on the trajectory of the Euro and to what extent it will continue. Goldman Sachs had quite a pessimistic outlook, predicting that the Euro would dip below the dollar to $0.80 as soon as 2017. Goldman was quoted on this issue:

ECB quantitative easing is setting in train large portfolio outflows by eurozone residents. On the other side of the equation, the dollar rally is in full bloom. After all these years of extraordinary monetary accommodation, which prevented the Dollar from trading its true strength, we see the coming normalization of US monetary policy as an important catalyst

At the time, HSBC had a quite contradicting conclusion, stating that they felt the dollar was reaching its end of its rise, and the Euro would appreciate about 15% through 2017. Regardless, people feel the decline of the value in the euro is correlated to the convergence of euro zone bonds with US bonds.

As of last Thursday, however, the Euro had reached a 3 month high, contrary to the predictions of many. This seems to be occurring because the United States economy is slightly underperforming at the moment. However, in the three months ending 14 May 2015 the euro has grown by 0.4%. The trade levels between the Euro and the US Dollar both were at their highest levels in 3 months. During this period the Euro has risen in value, but the overall exchange volume has diminished noticeably. The volatility of the markets in Europe has diminished, therefore the flow is slowing and the Euro is improving.

As a result, the Euro is slowly turning around from its rapid decline, and likely should recover. The dollar for the 5th consecutive week has been weakening relative to the Euro.

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