Don’t Fret the Euro

06/03/2010 12:01 am EST

Focus: FOREX

History is often a very good guideline when we enter times of extreme volatility in markets and trading. Currently, the plight of the EU currency the euro has many gnashing their teeth worldwide. The euro is making a test of the key 1.20 area versus the US dollar (see the monthly chart below).


Click to Enlarge

From a technical basis, the euro certainly could hold this 1.20 level and bounce from here. However, from a longer-term historical basis, there really is nothing wrong if it does break down through this level. The euro was basically "pegged" at a one-to-one basis with the dollar at its creation. Subsequently, it traded in a 0.80 to 1.20 range around the dollar for several years after (see the highlighted box on the chart). This is a logical 20% up/down range above the mean, in my view.

In the years since, we have seen a new extended range for the euro, roughly 1.20 to 1.60. However, a breakdown of this newer range and a re-establishment of the previous range (which may well happen) would not be an abnormal or unexpected type of occurrence. In fact, for those of you who have traveled to Europe from the US during this time, you may agree with me that a sub-1.20 euro is actually a more "healthy and normal" rate when you look at consumer prices.

By Moby Waller of BigTrends.com

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