An Endgame for the Euro?

Days after the dollar touched a new nadir against the euro -– indeed, one euro briefly fetched $1.60, a symbolic milestone -– the beleaguered buck is enjoying a bounce.

Some even saw a parallel to politics. “Just like Hillary Clinton, when all seemed bleak, USD staged an almost improbable recovery,” wrote David Watt, a currency strategist at RBC Capital Markets late Thursday.

By this morning, one euro bought about $1.56.

Of course, the dollar has had many such minor rebounds, and they always turn out to be short-lived. Several currency experts, however, see a hint that something different might be happening this time around.

Much of the euro’s recent invincibility stems from two factors. One, economic growth in the euro zone has been remarkably impervious to events in the U.S. Two, the U.S. Federal Reserve has embarked on a dramatic campaign to cut interest rates, undermining the appeal of short-term investments in dollars, while the European Central Bank has held its rates firm.

Now two small cracks have appeared in that armor. On Thursday, Germany’s IFO survey of business sentiment came in lower than expected, indicating deteriorating conditions in Europe’s largest economy. At the same time, some investors believe that the Fed will cut its key rate next week but then take an extended pause, stabilizing the gap between U.S. and European interest rates.

If bad news out of Europe starts to accumulate and the Fed stands pat, the dollar’s slide could taper off. However, that’s probably not the end of the dollar’s travails.

“What’s the endgame?” says Art Steinmetz, a bond portfolio manager at OppenheimerFunds. “The ECB goes into an easing cycle at about the time the Fed is going into a hiking cycle.”

That’s still months away (if not more). But some are keeping a very close eye on the horizon.

Source: http://blogs.wsj.com/marketbeat