Market Timing  |  MAY 1999

The Euro’s True Colors by Walter Bressert and Doug Schaff

The Euro’s True Colors by Walter Bressert and Doug Schaff How do you analyze the Euro, a currency that sprang to life with no price history? How do you analyze a full-fledged currency that came into being overnight? Despite its literal lack of price history, millions of foreign currency market participants — importers, exporters, investors, risk managers, not to mention others — instantly had exposures, long or short, the moment the Euro took its first breath. There is no doubt that fundamental factors will determine the Euro’s value, as they have for the German mark, the French franc, and other currencies. The problem arises in interpreting the direction and impact of gross domestic product (GDP), trade, interest rates, and politics in the short run. In addition, while fundamentals move the markets, they often look the most bullish at tops and the most bearish at bottoms. On July 9, 1998, the mark, the franc, and other European currencies made cycle lows. The currencies rallied in October of that year on the back of weaker US capital markets and positive anticipation for the Euro — talk of economic synergies, a smooth start for the new currency, and capital flowing into Europe.

by Walter Bressert and Doug Schaff