Weekly newsletter 25 November 2015 - Will the EURO weaken or strengthening the coming year against the dollar?

A lot of European expats in the UAE still think in EURO and send money back to their home country. For them the EURO rate is something they like to follow or must follow. For others the EURO rate might affect them as well. For example if company X wants to order goods in EURO from company Y, then if the EURO gets stronger they need to pay more for the same goods. On the other hand the same goods will become cheaper when the EURO goes down against the dollar.

Historically the Euro rate against the Dollar has been changing since inception, see chart below:

The euro has been as low as 0.84 since inception. Its peak has been 1.58. The difference between the lowest and highest rate is around 85%. During the financial crisis the euro strengthened significantly against the dollar and afterwards it has been gradually going down with ups and down.
The FED has been keeping interest low in the US for almost a decade and has been increasing the money supply of Dollars with their stimulation program in the past. This has weakened the dollar against the EURO. The ECB announced in January 2015 the massive quantitative easing program, which increases the EURO money supply. This normally weakens the EURO and we have seen the EURO going down quite significantly this year. Last month Mario Draghi prepared the market by hinting at an extension and increase of the quantitative easing program.

Friday 20/11/2015 Mario Draghi president of the ECB said the following:

“If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate. In particular, we consider the APP to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance.”
That may not sound like much, but in central bank speak it's as close to a promise as it gets.
In recent weeks, Fed officials, including Chairwoman Janet Yellen, have talked up their intention to hike key interest rates -- currently at record lows -- in December. Last week, during testimony before a congressional committee, Yellen said a December rate hike was a “live possibility,” and, most recently, on Tuesday 16-11-2015, San Francisco Fed chief John Williams also said there was “a very strong case” for doing so. (http://www.ibtimes.com/expectations-december-rate-hike-grow-analysts-look-us-fed-policymakers-direction-2180831)

If the FED is going to increase the interest rate, it will be most likely that investors will turn towards the dollar. On the other hand if the ECB is going to increase the money supply for the EURO with their quantitative easing program the EURO will weaken. It is likely that both of these things will happen the coming months, therefore my expectation is that the EURO will weaken the coming 12 months against the dollar and that it will be likely between 1.02 -1.05 and perhaps even below 1.


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