Europe's currency is toughening up, in part because fiscal crises in the US and Japan suddenly seem much more dire. But how long will it last? MoneyShow's Jim Jubak, also of Jubak's Picks, explores the issue.

Pick your metaphor: The tide has turned. The weather is changing. The momentum has shifted with a change in quarterbacks.

Anything works as long as it describes the current reversal in strength by the euro against yen and US dollar, and reminds us that the reversal is itself easily reversed and that we don't know much about the timing of the next reversal.

I prefer "tide" to describe the euro's comeback. It suggests not just the turn in the currency markets, but a change in the flows that all financial assets swim with or against.

The reversal in the relative strengths of these big three currencies will, after all, have an effect on everything from earnings at big US multinationals such as IBM (IBM) and PepsiCo (PEP) to the price of commodities and commodity stocks, to the balance of imports and exports in China, to the growth rate of the Brazilian economy.

The biggest effect, though, is likely to be on the prices of stocks in emerging markets such as China and Brazil. If you're invested there, take note.

The Big Comeback
The euro had been in decline against the dollar and yen since the end of February through July 24. After a rally through October 17, it dropped again until November 13.

During those specific declines and during that seven-month period in general, money flowed into dollars and yen and into assets denominated in those currencies.

  • A rising dollar weighed on the price of commodities such as gold and oil.
  • Japanese exporters found themselves at a painful disadvantage in selling their goods—such as cars—to European customers who weren't inclined to buy anyway as their economies slipped into recession.
  • US companies such as McDonald's (MCD) reported disappointing earnings, as cheaper euros from sales by European units had to be translated back into more-expensive dollars.

For the week ended December 14, the euro finished at $1.3163 against the US dollar, and the yen closed at 83.52 to the US dollar. The euro rose 1.8% this past week to its highest level against the dollar since May 4. The yen dropped 1.3% against the dollar to hit its lowest level since March 21. The yen fell 3% against the euro to hit its lowest level since April.

How big a change is this? On Nov. 9, the euro traded at $1.2694 to the US dollar. The low came on July 24, at $1.2089.

Despite the recent recovery, the euro is still down from its February 28 high for 2012 of $1.3454. That, of course, suggests that the euro could move higher in the coming weeks.

What's Behind the Rally
It's not hard to see why the euro has rallied against the yen and the dollar. It's partly because of positive developments in Europe.

In the past week, Eurozone finance ministers approved both the next big rescue payout to Greece and the first (and easiest) stages of what would be a European banking union. The first took the possibility of a Greek default/economic shutdown off the table. The second demonstrated, for the moment, that European leaders could make progress on their long-term agenda.

Add in the lack of an interest-rate cut from the European Central Bank on December 6—the bank kept its benchmark rate at a historic low of 0.75% for the fifth straight month—and you've got support for the euro coming pretty much from all sides. (The negative news is that the Eurozone economy continues to contract and the recession is both widening and deepening.)

Contrast the non-action by the European Central Bank with the stimulus from the US Federal Reserve and the stimulus to come (maybe) from the Bank of Japan.

Tickers Mentioned: Tickers: IBM, PEP, MCD