Making Money Alert
ETF Talk: Don't Go Long the Euro Just Yet
12/28/2011
The biggest story going into 2012 likely will be the fate of the euro. In recent months, we have witnessed politicians, finance ministers and central bankers in Europe struggle to find a solution to a terribly difficult fiscal situation there. So far, their answer seems to be to issue more euros to cover runaway deficit-spending. Indeed, total assets rose 10% to €2.73 trillion just last week in the most recent financial statement of the Eurosystem, which comprises the European Central Bank and the national central banks of its member states that use the euro as a common currency. The Eurosystem is especially important because it is the monetary authority of the euro area.
If you think the worst for the euro is behind it and that the currency will recover from its 2011 travails, one way to invest in that belief is through the CurrencyShares Euro Trust (FXE). The fund is designed to track the price of the euro, net of Trust expenses, which are expected to be paid from interest earned on the deposited euros. In my view, do not be surprised if FXE trends still lower as 2012 begins. While the dollar/euro exchange rate will continue to fluctuate, analysts predict a range of $1.20 to $1.50 for 2012. FXE currently is trading at $129.00, which equals a $1.29 per euro exchange rate.
As the Eurosystem’s balance sheet continues to expand at an alarming rate, the situation should send the euro lower. While a devaluing euro is a precarious road for Europe to travel, it is a boon for the value of the U.S. dollar. Investors worldwide have been moving their assets back into dollars since the Fed’s quantitative easing part II (QE2) program ended in 2010 and the increased issuance of euros began. The latter trend is expected to continue into 2012 as the more financially sound European nations, such as Germany and France
On the other hand, the U.S. dollar should continue to perform admirably. The dollar saw a nice jump of nearly 1% this morning as the currency strengthened after Italy Italy Europe fell. But savvy investors realize that the Italian debt auction is only a short-term stop gap. A more comprehensive plan still seems elusive, with many European citizens protesting against austerity measures. With European economic growth slowing and the European Central Bank issuing new euros at a brisk pace, the devaluation of the euro seems destined to continue in the New Year.
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