The euro bubble is bursting

When I wake up and start working one of the first things I do is read some sites, forums and blogs to get up to date. One of the many things I check a couple of times a day is the EUR/USD currency exchange rate to see where it’s heading.

Over the last couple of weeks the dollar made a huge rally, it recovered from a low of around 1.6 dollar per EUR in April and Juli to 1.285 dollar per EUR right now – a gain of almost 25 percent in just 3-4 months time. I’m pretty happy about this as I earn most of my income in dollars and because I opened a savings account in dollars a half year ago. A lot of the income I earned then, when the dollar was trading between 1.5 and 1.6 dollar per EUR, remained on the dollar account as I was expecting a rebound of the dollar.

I was pretty surprised by how fast the dollar gained on the euro and as I didn’t know where it would be heading next I converted about half of my dollars to euros two weeks ago when the dollar was trading around 1.35 dollar per EUR.

Today the dollar reached one of its highest levels since late 2006, it was briefly trading at 1.2737 dollar per EUR.  The reason why the dollar is doing so much better now isn’t because the US is doing well – the economy in the US is slowing down, the trade deficit remains huge and the US government is adding billions to their debt everyday. The reason why the dollar is soaring seems to be a combination of the following points:

  • The EU and the rest of the world (including the BRICs) are doing a lot worse then expected. Banks are getting bailed out everywhere and even some countries (Iceland being the most prominent example) are in deep shit.
  • Large financial institutions are dumping euro assets to get more $ cash
  • US Treasury Bonds are seen as a saveheaven by investors worldwide

Here’s a chart of the US dollar to Euro currency exchange rate since 2000. It’s a bit out of date though, the chart misses data from Monday and Tuesday so the blue line should be even lower.

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