Can Europe Handle 1.40 Euro?

Back in 2005 when the Euro was trading at 1.17, we use to say that the path to a stronger Euro was through a weaker one. Now, we hold the reverse view, which is that the Euro’s strength will be what triggers a weaker currency.

Since the Eurozone is heavily dependent upon exports a weak currency goes a long way in boosting growth while a strong one will crimp it. Therefore we expect Eurozone economic data to begin to deteriorate in the months forward as 1.40 Euro begins to have a meaningful impact on the overall economy. At this point, there is no need for a further interest rate hike from the ECB because even though rising oil prices are stoking inflationary pressures, a rising currency will offset some of that pressure. Going forward we also expect the corporate sector to loudly complain about the strength of the Euro. The French have been screaming for months and the Germans should soon follow suit. This may eventually force Trichet to drop his optimistic outlook, which would trigger a top in the Euro.

Written by Kathy Lien, Chief Currency Strategist of