2024-01-11 07:30:00 ET
Summary
- The euro is the world's second-leading reserve currency, but its path against the US dollar in 2024 is uncertain.
- The euro has been in a multi-year bearish trend against the US dollar since 2008, but the short-term trend is currently bullish.
- The war in Ukraine, falling US rates, the potential for a BRICS currency, and the upcoming US election are factors that could impact the euro-dollar relationship in 2024.
- FXE tracks the euro-USD currency pair.
The euro is the world's second-leading reserve currency behind the U.S. dollar. It's the primary component of the dollar index that measures the U.S. dollar against other world reserve currencies. After moving higher in 2023, the euro's path of least resistance against the U.S. dollar in 2024 is uncertain.
The euro is the world's newest currency. At the turn of this century, the euro replaced a basket of European currencies, including the German mark, French and Belgian francs, Dutch guilder, Italian lira, Greek drachma, Spanish peseta, Portuguese escudo, and other foreign exchange instruments.
Since 2000, the euro has been as high as $1.6038 and as low as $0.8230 against the U.S. dollar. The euro is beginning 2024 in a multi-year bearish trend that started at the 2008 $1.6038 peak. The Euro Trust Currency Shares ETF (FXE) moves higher and lower with the U.S. dollar vs. the euro's exchange rate, moving higher when the euro increases in value against the U.S. currency.
A bearish trend in the euro-dollar exchange rate
After reaching a $1.2349 high in January 2021, the euro has made lower highs and lower lows against the U.S. dollar.
Five-Year Chart of the Euro versus the U.S. Dollar Currency Pair (Barchart)
As the weekly chart highlights, the euro made a lower $1.22659 high in May 2021 before falling below $1.00 for the first time since 2002 in July, August, and September 2022 when it reached a $0.95364 low during September 2022's final week. Since then, the euro has recovered against the dollar, making higher highs and reaching $1.12754 in July 2023. The euro was trading over the $1.09 level on Jan. 10.
While the long-term and medium-term trends in the euro remain bearish, the short-term path of least resistance is bullish.
The bearish case - War in Europe
The war in Ukraine is at Western Europe's doorstep, with NATO countries supporting Ukraine in its struggles against President Vladimir Putin. Russia is a leading energy, metals, and agricultural producer, impacting European prices and the flow of essential raw materials.
The war in Ukraine is bearish for the euro because the war impedes commodity flows. Moreover, the ongoing conflict threatens to draw European countries into the hostilities.
The economic impact of the bifurcation of the world's nuclear powers is a significant reason for European economic travails that could continue to weigh on the euro's value against the U.S. dollar in 2024. Meanwhile, the increasing potential for a BRICS currency with gold backing to challenge the U.S. dollar and the euro's roles as the leading world reserve currencies could cause the euro and the dollar's influence to decline regarding cross-border payments and have further implications for the currencies in the global financial system.
The bullish case - Falling U.S. rates, the potential for a BRICS currency, and a contentious U.S. election
The Fed has paused interest rate hikes over the past months as U.S. inflationary pressures declined. At the early December FOMC meeting, the central bank lowered its rate expectations for 2024, implying rate cuts could be on the horizon over the coming months. Since rate differentials are critical for the path of one reserve currency against another, falling U.S. rates while euro rates remain stable could cause the euro to appreciate versus the U.S. dollar.
While a BRICS currency could be bearish for the euro as the dollar and euro lose their footing in the worldwide financial system, it could be bullish against the dollar if European countries recognize and welcome a BRICS currency over the coming months.
Meanwhile, the upcoming U.S. election may be the most significant factor for the euro-dollar relationship. As of early January 2024, the polls suggest a rematch of the 2020 contest, with the incumbent President Biden facing former President Trump. The U.S. is divided along party lines, indicating a very close contest. Meanwhile, President Biden's awful poll and approval numbers pit the incumbent against former President Trump, who faces legal issues. Uncertainty and even dismay over the U.S. leadership from 2025-2029 is not bullish for the U.S. dollar's value on the worldwide stage.
Bullish and bearish factors suggest that the euro versus the U.S. dollar currency relationship could be volatile in 2024.
FXE is the ETF that tracks the euro against the dollar
The most direct route for a risk position in the euro-U.S. dollar foreign exchange pair is via the over-the-counter forex market or the CME futures. The Euro Trust Currency Shares ETF (FXE) tracks the currency pair, moving higher as the euro rises and the dollar falls and lower when the dollar outperforms the euro.
At $101.24 on Jan. 10, FXE had around $216.7 million in assets under management. FXE trades an average of 37,980 shares daily and charges a 0.40% management fee.
The most recent significant rally in the euro versus the dollar took it 18.2% higher from $0.95364 in September 2022 to $1.12754 in July 2023.
FXE rose 17.5% from $88.37 to $103.84 per share over the same period. Since the forex market trades around the clock and FXE is only available for trading during U.S. stock market hours, the ETF can miss highs or lows when the stock market is not operating. However, FXE does an excellent job of tracking the currency relationship when trends develop.
Levels to watch in the euro-U.S. dollar exchange rate
Currency trends can last for months or longer. Therefore, following the technical trends can be far more successful than a fundamental approach.
The 10-year chart of FXE shows critical support at the September 2022 $88.37 low, with technical resistance at the January 2021 $115.86 high. The support and resistance levels correspond to the euro versus U.S. dollar exchange rates at $0.95364 in September 2022 and the $1.2349 high in January 2021. At the $1.09-$1.10 level on Jan. 10, the currency relationship is in the middle of the trading range, searching for a direction.
The odds of a tight trading range in the euro versus dollar exchange rate are low in 2024. Many factors could cause a broader range than in 2023 when the currency pair traded from a $1.04487 low to a $1.12754 high. In early 2024, the short-term trend suggests a stronger euro and a weaker U.S. dollar. FXE will appreciate if the trend continues over the coming weeks and months.
For further details see:
FXE: The Potential For A Euro Rally In 2024