Euro / Dollars

Why is the Euro so strong?

A couple years ago there were widespread expectations of a Euro-zone breakup. Greece was facing ejection, and when small nations like Estonia joined the Euro, the biggest question was, “Why?” Many observers expected the Euro exchange rate to go to parity with the Dollar, or lower.

But that never happened. In spite of Europe’s entering a second recession a year ago or so, the currency has been remarkably stable. At its weakest, it was about $1.20. Now it’s $1.32, and has been near that level most of the year.

Some credit the ECB’s bank support—providing long-term financing for banks throughout the system. Others look to the Euro-zone’s current-account surplus, a fruit of the zone’s fiscal austerity. But it seems to me that the answer is much simpler: interest rates. Rates in the US are near zero, overnight rates in Europe are 0.50%. Investors can earn more, risk-free, sitting in Euros. It costs them money to bet against the currency.

So the Euro has been stable, in spite of all the negative expectations. While the common currency may have issues, reports of its death were greatly exaggerated.

Douglas R. Tengdin, CFA

Chief Investment Officer

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