The Euro Maybe Down but it is Not Out
Between sovereign debt downgrades and a growing lack of confidence in eurozone politics, the euro has proved relatively hard-wearing over the past year.
Behind the scenes politicians and central bankers have worked to bolster the single currency with loans from the European Central Bank (ECB), bailout funds for countries on the brink of financial collapse, and expensive bond buying programs.
As a result the euro has remained strong, and is trading at 1.3050, not far off its value of this time last year. And although the euro has slipped since its peak in July at 1.42 to the greenback, it has since maintained its strength to trade in a range.
However, 48% of fund managers view the single currency as overvalued, according to a new survey carried out by Bank of America Merrill Lynch. So can the single currency continue to hold up against sterling and other currencies?
The strength of the euro can only be considered in relative terms to its major trading partners. That’s why, when compared with sterling and the 
struggling UK economy, the euro looks relatively strong.
You’ve fundamentally got two currencies, both of which are weak. The eurozone is obviously weak because of the peripheral problems and sterling’s price is basically a reflection of a poor UK economy, with low growth and high unemployment. The euro hasn’t been as strong against all currencies.
If you look at something like the euro against the Aussie dollar, it has fallen off a cliff to reach its lowest ever levels. So in terms of the euro’s resilience it has really been against the major currencies but not the commodity currencies.
Since the euro quieted down in 2007, it has pretty much traded in a range. It is very weak within that range and it’s largely to do with investors looking at the worst outcome
If Europe slips into a recession, a strong pound could hurt the economy and slow down the country’s recovery. Europe is the UK’s biggest export partner, and a stronger pound would make it more expensive for foreign businesses and consumers to buy British goods.
The pound will gradually gain strength against the euro, but not on the grounds of a Europe-wide recession. It will be falling inflation in the UK, which currently stands at 3.6%, that will attract investors to buy the country’s bonds, or gilts, as yields become more attractive. This in turn should help to support the currency.
As the US begins to show more growth and strength, the euro will begin to develop weakness, as the UK economy begins to turn around that weakness will extend to the Sterling. And the eurozone return to growth at this point is far off in the future. But the euro will maintain it’s power, as giants like Germany begin to turn on the steam. The euro may be down, but it is not out.
Originally posted here
