Euro relative performance

To some observers, the Euro’s sharp decline vs. the dollar from July through November was a sea change — the end of the Euro’s bull run — despite the fact the move was triggered by a historic global economic crisis that drove money into the U.S. dollar as a safe haven.

It is a daily chart of the EUR/USD pair. After reaching a closing high of 1.5990 on April 22, the pair moved mostly sideways before the mid- July breakdown (it eclipsed 1.600 intraday on three occasions during this period). The pair had shed more than 22 percent by the time it closed at 1.2453 on Nov. 20 — a sell-off that might seem dramatic were it not for the fact that the Euro lost nearly 30 percent vs. the Japanese yen (JPY) during the same period.

It compares the percentage moves in the Euro and the U.S. dollar vs. the other major currencies (yen, British pound, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar) during the EUR/USD’s April- November down move and subsequent November-December rebound.

The overarching and intertwined themes during the fall financial panic were liquidation and repatriation: money managers and investors got out of all kinds of assets and reverted money to home-country currencies. The Japanese yen — a short-side favorite in forex carry trades because of Japan’s perennial low interest- rate environment — was boosted dramatically. Not only did the yen skyrocket vs. the Euro, it was also the only major currency the buck lost ground against between April 20 and Nov. 20 (-9.04).

Further inspection suggests the “Euro story” has really been the “Dollar story,” or even the “Dollar/yen” story: The Euro was battered much more vs. the yen than the greenback, and the EUR/USD pair’s specific decline was driven by a singular economic event.

In fact, the Euro gained ground against the Australian dollar, New Zealand dollar, and British pound, held its own against the Canadian dollar, and dropped moderately vs. the Swissie. These gains overall did not compare to the U.S. dollar’s huge surges against these currencies, but they do highlight the unique dynamic that was pitting the Euro vs. the dollar in a battle it could not win.

The EUR/USD pair rebounded to the tune of nearly 16 percent from Nov. 20 to Dec. 17 on a closing basis, cutting the Euro’s total loss since April 22 to a little less than 10 percent. Also, during this November- December rally, the Euro gained ground vs. all the other major currencies while the U.S. dollar gave back much more (a median loss of 10.30 percent).

Overall, the Euro and the U.S. dollar are not too far apart when assessing the entire April 22 to Dec. 17 period, especially when the yen wild card is removed from the picture. The Euro gained an average 12.44 percent vs. the five remaining currencies (median 15.78), while the dollar gained an average 19.68 percent (median 22.15 percent).

In short, the performance underscores the EUR/USD move is about the dollar more than the Euro. But it raises the question of the importance of European Central Bank (ECB) interest- rate policy as the new year begins. The ECB has lagged other central banks in cutting interest rates in the face of the global economic slowdown. If it is forced to compensate, it could put a lid on the Euro’s strong rebound vs. the dollar, even if the dollar’s safe haven pop is over and done with.