Big red flags usually go off in my head when everybody seems to be on the same side of a trade (in particular when everyone on CNBC writes something off as a foregone conclusion), but that daily on FXE ain't pretty.
I'd say twice as likely that euro will go same distance other way, up not down, by end of 2011. That is if expectation of more bad news from Europe and herdishness which follows from it are at crests. The move could be startling, because you might say Greece is where USA will be in a few years, in which case euro will get you two dollars and more before too long.
Have to compare apples with apples...not olives and apples.. The only real comparison between Greece and USA is both governments are corrupt and incompetent. The fundamentals of the european economy and neighbouring countries suggest a tsunami of bad tidings ahead. The US dollar may be considered to be a second class currency, but that makes all other currencies third class... NiN
I closed out my entire EUR short just prior to market close today. I usually take a decent position into the weekend, but the EUR breaking through important support levels against the USD (1.20), JPY (110), and CHF (1.40) made the hair on the back of my neck stand up. The odds of a coordinated central bank intervention on Sunday night went up considerably. You don't understand the dynamics of being the world's reserve currency (USD) and rising-now falling secondary reserve currency (EUR). There are several central banks (Iran, Nigeria to name two) that are starting to dump their euros. You also don't understand the amount of leverage that European banks have. It's leverage on the scale of LTCM; it will not end well.
Bearish analysts clearly hope that European monetary authorities will tacitly support through inaction their short euro bias, because "Europe" wants to "inflate its way out of debt"[1] (unfortunately, price stability is the primary objective of the ECB, see [2]) or because "Europe" wants âthe currency to weaken to generate growth"[1]. This is probably why euro-politicians tend to exhibit that 'surprising' indifference to the euro's 'low' valuations. But that's precisely where their textbook macroeconomics falls hmm... short of empirical evidence, creating the so-called Cooper paradox: currency devaluations are just as contractionary as fiscal tightening and their (usually combined) effect can last for years: "Contrary to the traditional view, however, substantial research supported by empirical evidence has shown that a devaluation can result in a contractionary impact on output [..] The long lag with which devaluations were found to produce an expansionary effect on output indicates that currency depreciations cannot be used as a quick remedy for recessions. Consecutive short-run depreciations of the currency should also be avoided because they result in a sustained negative impact on real output that delays the expected positive effect."[3] To reduce my natural bias (family savings etc), I'd admit that the EUR.USD parity forecast (indeed made 'as early as' mid-May by BNP and RBS [4]) can be probably justified on statistical grounds by long-term mean-reversion, especially if you include euro's predecessors, i.e. XEU and EUA (see: - http://stooq.com/c/?s=eurusd&c=mx&t=l&a=ln [5]). ______ [1] Busch, Andrew, interviewed for Bloomberg in: 'Euro Tumbles on Debt-Crisis Concern, Touching Lowest Since 2006', Bloomberg online, URL: http://www.bloomberg.com/apps/news?pid=20601083&sid=axTTiSuX3gvc [2] Objective of monetary policy, ECB, URL: http://www.ecb.europa.eu/mopo/intro/objective/html/index.en.html [3] El-Ramly, Hala, 2008. The Effect of Devaluation on Output in the Egyptian Economy: A Vector Autoregression Analysis. International Research Journal of Finance and Economics 14, 82-99, URL: http://www.eurojournals.com/irjfe 14 hala.pdf [4] Euro Swaps Corner Trichet as Currency Slide Persists, Bloomberg, URL: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIvr3NPO2SmA&pos=2 [5] The EUA part of this chart is probably wrong though, because the EUA was set up in 1974 to have the initial value of US$1.20635, according to the Wikipedia article on the European Unit of Account, URL: http://en.wikipedia.org/wiki/European_Unit_of_Account