With the Eurozone PIIG countries facing a long and painful recession, and many calling the EU bailout a disaster, some analysts believe that the Euro will eventually be on equal footing with the US dollar. Investors would be wise to consider shorting the Euro in the near term. See the following article from International Living for more on this.
By 2012, one greenback will buy you one euro.
This is important whether you’re a currency investor or simply planning a European vacation. The euro will reach parity with the dollar—sooner than you think.
The dollar is the world’s reserve currency.
It took a financial crisis to show just how important a reserve currency is. You see, when people panic they pull their money out of risky assets such as stocks and commodities and put it back into cash. And the most liquid currency in the world is the U.S. dollar.
Of course, many dollar bears ignored this reality. They saw only America’s huge budget deficits and near-zero interest rates. And they fled the buck and bought the euro.
After all, Europe had higher interest rates and a central bank modeled closely after Germany’s famously conservative Deutsche Bundesbank.
Germans know all about the risks of hyperinflation, thanks to the runaway inflation there in the 1920s. This makes them reluctant to turn to the printing presses.
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This is one of the reasons it’s supposedly illegal for the European Central Bank (the E.U.’s equivalent of the Federal Reserve) to inflate the euro.
Of course, when a law no longer suits a government it can simply rewrite the statutes. This is exactly what the ECB did in its recent 750-billion euro ($1 trillion) bailout. It allowed the ECB to buy Greek government bonds, effectively printing up fresh euros to pay the bill.
This risks causing the first great inflation of the euro.
Truth is, the bailout has been a disaster.
Germany’s savers and earners don’t get why they have to pay for Greece’s excesses (what Germans refer to as “fiesta and siesta”). Greeks are rioting in the streets because they think the Germans are punishing them for no good reason.
Make no mistake: Europe will suffer in the coming years. The required budget cuts alone—about 10% of GDP—will virtually guarantee a long and painful recession in the so-called PIIG nations (Portugal, Ireland, Italy, Greece).
This alone could destroy the euro as we know it.
So what is an investor supposed to do?
Since the euro peaked 1.5893 to the dollar on July 7, 2008, it has plunged a massive 36%. I believe it will reach parity with the dollar before long.
With budget cuts and tax raises looming over the next three years, it’s a near certainty that the E.U. will be forced to keep interest rates low. This means that U.S. interest rates should catch up with European rates.
This would further favor the dollar over the euro, as the higher a country’s interest rate the more return investors get on their currency deposits.
If you earn in U.S. or Canadian dollars and haven’t seen the sights of Europe yet, now is the time to go. Your dollar will stretch a long way thanks to the fallout from Europe’s debt crisis.
If you’re an investor, shorting the euro could reap big rewards over the next few years.
An easy way to play this is to buy the ProShares UltraShort Euro ETF (NYSE:EUO). This exchange-traded fund will give you twice the inverse performance of the dollar price of the euro.
This article has been republished from International Living.
