Euro Bashing

It has become fashionable to bash the euro, European economies, and their financial markets.  I hear a lot of talk about 1.15, 1.20, and parity between the dollar and the euro.  Yes, Europe's governments are a big part of their GDP and any sovereign debt problems weigh heavily on their economies.  And Europe will likely grow slower than the US.  But let's not forget that the value of a currency is not based on nominal GDP growth rates.  Otherwise, Zimbabwe would have the strongest currency in the world.  And Japan would have one of the weakest currencies.  But that's not the case. 

If you look at past history, the euro has been strengthening versus the dollar.  Historically, the ECB has a tighter monetary policy than the Fed.  Europe has a trade surplus and the U.S. has a trade deficit.  In the long run, under those conditions, it is hard to have the U.S. dollar sustain strength versus the euro.  The same goes for the U.S. dollar versus the yen and the yuan. 

The investment community is quite illogical when it comes to the ECB and the Fed.  The ECB is doing a tiny fraction of the debt monetization that the Fed has already done and yet the euro gets hurt on the theory of debt monetization.  If the financial markets are predicting further ECB debt monetizations on economic weakness, they are making a bold bet.  Even during the depths of the 2008 crash, the ECB refused to do quantitative easing.  Currently we are nowhere near that kind of dire economic situation. 

Let's not forget what happened in 2008.  When the euro was trading between 1.55 to 1.60 versus the dollar, dollar bashing was quite fashionable as commodities soared.  That ended up being the historical top for the euro.  Today is a mirror image of the spring of 2008.  In fact, the fund community is probably more short euro now than they were long euro in spring 2008.  The euro is not likely to make a sharp move back up any time soon, as it takes time for sentiment to change.  In order to confirm that a bottom is being made, I would want to see the bearish sentiment stay in place while the euro does not make new lows for several weeks.  Then I would ride the euro and look for a sharp move higher, probably sometime in fall.