The story of the euro has been one of depreciation in the past year, with eurozone exporters apparently benefiting most from the decline in the currency.
After many months of uncertainty surrounding Greece earlier this year, it is clear the country will remain in the euro, for now. But while the Greek crisis has abated, emerging markets have been causing significant market volatility during the summer.
European Central Bank (ECB) president Mario Draghi has signalled his intention to continue with the bank’s asset-purchase programme to September 2016, and even beyond if required.
In a note published by the International Monetary Fund (IMF) in September ahead of the G20 meeting of finance ministers and central bank governors, the organisation pointed out preliminary data suggests the weaker euro has been a boon for exports in France and Germany in particular.
The IMF says: “In the euro area, the ECB’s expanded asset-purchase programme has improved confidence and financial conditions, and raised inflation expectations initially. More recently, however, inflation expectations have reversed and the euro has strengthened, which could put downward pressure on prices.
“Hence the programme should be extended if there is not sufficient improvement in inflation consistent with meeting medium-term, price-stability objectives.”
Alan Wilde, head of fixed income and currency at Baring Asset Management, says: “All things considered, the euro has held up well against the US dollar and the Japanese yen, but has weakened versus sterling. Considering the sharp reversal in bond yields in the second quarter, the protracted uncertainty of Greek bailout talks and the imminence of the first US [interest] rate hike, the euro could easily be much lower.”
So what does all this mean for investors exposed to the European currency?
Mr Wilde continues: “I believe the US dollar is set to gain further against all other currencies, so I would expect a lower euro in due course. A September hike by the Federal Open Market Committee [FOMC] will probably test this year’s lows… but conciliatory language that points to a shallow path of further increases may ameliorate the downside.
“Sterling should also strengthen versus the euro as UK growth is better and the Bank of England is likely to begin tightening not long after the FOMC.”
IG Group market analyst Chris Beauchamp agrees the euro has been “clawing its way higher” against the dollar.
He explains: “It has not been a smooth path, and the overall gain is slight compared with the hefty downward move last year. But predictions of the euro’s demise have been rather wide of the mark.
“While the ECB continues to hint at more quantitative easing (QE), it has stopped short of any explicit indication that more is on its way, and thus the main focus is US dollar strength.”
He adds: “It has been a similar story against sterling – a downward move to the end of 2014, then consolidation as QE gets under way and now a bounce as expectations of Bank of England tightening are pared back.”
