The Falling Euro Faces Many Challenges Ahead
On Tuesday, the euro hit a new low for the year against the dollar, after a poor report from the Bundesbank, Germany's central bank, undermined hopes of progress for the German economy. That dropped the value of the euro out of the lower end of its August trading range of 1.334-1.324. How far down it may go remains to be seen.
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European Central Bank President Mario Draghi will assert that a lower euro is part of a plan that should lead to greater exports and help boost businesses in the eurozone. Some critics have pointed out, however, that such a plan is not supported by recent history that shows a positive correlation between European equities and the euro.
Data from IG's technical forex platform.
Although European indexes have been risen the past few days, a correlation between that and the failing euro is less clear.
A bigger problem for the ECB is the poor performance of the eurozone's economy compared with the economies in the U.S. and the U.K. The U.S. dollar and equities have risen on positive U.S. economic news this summer, and the U.K. is on a broadly positive trend, too.
If the U.S. and the U.K. raise interest rates -- and indications are that they will, that would boost their currencies, making the U.S. dollar and British pound more attractive investments than the euro.
The problem could be exacerbated by the Scottish referendum in September, in which either outcome points to a negative result for the euro. Should the Scots decide to stay in the United Kingdom, a major point of uncertainty for the pound would be alleviated.
Should the Scots defect from the union, then the question of the stability of the eurozone would be brought to the fore again as it would have to consider the possible entry of a new country into its ranks. Another consequence could be that the U.K. would consider leaving the European Union, which could hurt the euro.
In short, the euro needs some positive financial figures to give it a boost soon, or risk continuing on a downward path for some time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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