The EUR dropped from 1.50 USD to 1.36 USD in two months. Many reasons have been invoked to explain the demise of the euro: governance failure within the euro zone, failure to set up credible assistance measures to help countries with worrying public debt burdens such as Greece, Portugal and Spain.
Value of one euro in US dollars since 2007 (source : Bloomberg)
The analysis of global currencies against the dollar gives a very different backdrop over the last three months (as of 5 March 2010)
GBP, CHF, NOK and many emerging currencies have performed poorly against the US dollar. Actually, sterling has been the worst performer among all currencies.
This very simple dashboard shows that the US dollar has been appreciating against almost all currencies (with the notable exceptions of CAD and KRW) since December 2009. The Euro zone solvency issues have only been an amplification factor of this global dollar trend.
And the dollar being a financing currency, the dollar rise is undoubtedly associated to a global deleveraging. A declining euro/dollar exchange rate may be good for some high profile exporters (such as EADS) but it is a worrying sign for the USD-financed global growth (see graph below).
Evolution of EuroStock 50 index (white) and euro/dollar parity (red) (source : Bloomberg)
The most cyclical currencies such as AUD/USD and KRW/USD have resisted quite well, which reveals conflicting forces among risky assets. Commodities have recouped all their losses and are trading around the tops of the 12 months rolling period. Base metals, which closely follow AUD and KRW, have exhibited the most impressive performance over the past twelve months.
The chart below, which is extracted from Riskelia’s Radar, highlights the relationships between the trends of commodities currencies, European currencies and oil and base metals.
The proprietary trend following monitor developed by Riskelia is based on the replication of numerous trend following strategies. It rates the trends with scores ranging from -100% to 100%. Trends have evolved in sync since the massive deleveraging of August 2008, all the way through December 2009, when the European Currencies started decoupling from commodities. By contrast, commodities currencies (i.e. AUD, CAD and NZD) and commodities have continued to evolve in tune even after December 2009.
Whether the recent EURUSD collapse is due to a dollar rise or a Euro demise will be learnt from the future evolution of currencies related to commodities (or emerging currencies) and if the latter happen to follow the same path as the Euro, the scenario to be expected on commodities and risky assets will be crystal clear.