Will the euro, which has fallen from its high to a historic low, have a chance to rebound in the next 5 years?

As the second-largest global circulating currency, the euro has experienced multiple major tests since its debut in 2002, including the 2008 subprime mortgage crisis, the European debt crisis, the pandemic impact, and the Russia-Ukraine war. By September 2022, the euro against the US dollar fell to 0.9536, hitting a 20-year low and leaving many market participants stunned.

So, what exactly has the euro experienced? Is now the time to buy the dip or continue to be bearish? Over the next five years, can euro investments still be profitable? Let’s start with a review of its historical trends.

The Glory Days of the Euro: the 2008 high of 1.6038

Looking back over the past 20 years, July 2008 marked a pivotal turning point. At that time, the euro against the dollar reached a historic high of 1.6038 before peaking and then retreating.

What was happening then? The US subprime mortgage crisis was erupting fully, and a financial tsunami was sweeping across the globe. On the surface, the crisis originated in the US, but its impact on Europe was even more profound:

Banking System on the Brink of Collapse: Major financial institutions were failing, with assets plummeting in value. European banks, intertwined with US counterparts through extensive business ties, also found themselves in trouble.

Credit Markets Freezing: After Lehman Brothers’ collapse, trust among banks shattered, and lending nearly dried up. Companies and consumers found it difficult to obtain financing, leading to economic stagnation.

Economic Recession Spreading: Investment and consumption declined simultaneously, causing many eurozone countries to enter recession. Capital flowed back to the US in large amounts, exerting significant downward pressure on the euro.

Government Interventions: The European Central Bank (ECB) had to cut interest rates and initiate quantitative easing. While these measures stabilized markets, they also put downward pressure on the euro exchange rate.

Hidden Bomb: The PIIGS Debt Crisis: Shortly after the crisis, debt issues in Greece, Ireland, Portugal, Spain, and Italy surfaced. These countries, collectively known as the “PIIGS,”’ debt crises raised doubts about the sustainability of the entire eurozone.

The Long Bear Market: from the high to historic lows

Over the following nine years, the euro experienced a prolonged decline. By January 2017, the euro against the dollar fell to around 1.034, a near decade-low.

Why did it rebound?

In early 2017, several positive signals emerged simultaneously:

Eurozone economic data began to improve—unemployment fell below 10%, manufacturing PMI broke above 55, indicating accelerating growth. The ECB’s quantitative easing started to show effects, and liquidity support from negative interest rates gradually took hold.

Political optimism also increased—2017 was a major election year across many eurozone countries, with market expectations that pro-EU governments would come to power, boosting investor confidence. Brexit negotiations also commenced, easing fears of worst-case scenarios.

Euro severely oversold—compared to the 2008 high of 1.6038, the euro had fallen over 35%. Most negative factors had been priced in, laying a solid foundation for a rebound.

This rally continued until February 2018, when the euro rose to 1.2556, reaching a new high since 2015. However, this peak quickly turned into a short-term top.

Reasons for the 2018 decline:

The US Federal Reserve began raising interest rates, strengthening the dollar index and exerting pressure on other currencies. Meanwhile, eurozone economic growth slowed, with manufacturing PMI retreating from high levels. Political instability in Italy further dampened investor confidence.

New historic low: 0.9536 in 2022

After years of volatility, the euro hit another historic low of 0.9536 in September 2022. What happened during this period?

Impact of the Russia-Ukraine War: Following the outbreak of war, risk aversion increased, and markets flocked to the safe haven of the dollar. Europe, as a geopolitical victim, faced energy crises and economic recession.

Energy Prices Surge: Disruptions in Russian natural gas and oil supplies caused European energy prices to soar in the first half of 2022. Natural gas futures surged above 200 euros/MWh, fueling inflation in the eurozone and raising business operating costs significantly.

ECB Forced to Hike Rates: Facing runaway inflation, the ECB raised interest rates twice in July and September 2022, ending an 8-year era of negative rates. While this demonstrated the ECB’s commitment to fighting inflation, rate hikes often imply economic slowdown.

Since the September 2022 low of 0.9536, the euro has begun to rebound:

Eased Geopolitical Tensions: Although the Russia-Ukraine conflict persists, it has not worsened further, and market fears of the worst-case scenario have eased. Risk aversion has declined, and capital has started flowing into risk assets.

Energy Crisis Abates: As Europe’s energy supply chains gradually adjust (increased LNG imports, ample reserves), international oil and gas prices have fallen. By late 2022, European energy prices declined significantly, easing corporate cost pressures.

Current situation: the euro is in a rebound phase

Today, the euro has recovered from its historic lows but remains well below its highs. The eurozone still faces challenges:

Weak Economic Growth: GDP growth is near zero, with aging industrial structures. Recent manufacturing PMI has fallen below 45, indicating a pessimistic outlook for the coming months.

Geopolitical Risks: Increasingly complex international situations create uncertainty that is unfavorable for safe-haven capital inflows.

Diverging Monetary Policies: The Fed has shifted to a dovish stance at the end of 2023, hinting at an upcoming rate cut cycle. Meanwhile, the ECB remains cautious about ending its rate hikes, keeping euro rates below US rates.

The next 5 years: Is there still investment potential in the euro?

Considering multiple factors, the euro’s future trajectory depends on several key variables:

First: Economic Fundamentals—If the eurozone can achieve economic acceleration and attract more international capital inflows, the euro could appreciate. Conversely, continued economic weakness will keep it under pressure.

Second: US Federal Reserve Policy Cycle—Historical experience suggests that US rate cuts typically lead to a 15-25% decline in the dollar index over 3-5 years. If the Fed indeed begins easing, the euro could benefit from a weaker dollar.

Third: ECB Policy—Although euro rates are below US rates, the ECB’s relatively stable policy stance can support the euro. The key is timing the start of rate cuts.

Fourth: Global Economic Conditions—Strong global growth would boost demand for eurozone goods and services, favoring the euro. Conversely, recession or stagflation would lead to capital flows back to the US, hurting the euro.

Fifth: Geopolitical Risks—Persistent geopolitical tensions will sustain risk aversion, favoring dollar inflows. Only when these risks significantly ease will the euro have greater upside potential.

Advice for investors

From the perspective of the euro’s historic lows, the current environment offers opportunities but also requires caution. Here are some key points:

Timing is crucial—In the short term (3-6 months), the euro still faces weak economic data and geopolitical risks. However, in the medium term (1-2 years), if the Fed begins rate cuts, the euro is likely to resume its upward trend. Long-term (3-5 years), depends on whether the eurozone can implement structural reforms and economic recovery.

Monitor economic data closely—Investors should keep an eye on employment, inflation, manufacturing PMI, and other key indicators. These will directly influence ECB policy decisions and, consequently, the euro’s movement.

US Federal Reserve policy is a key variable—The dollar’s trend has a profound impact on the euro. When the Fed shifts dovish, it often signals a good entry point for euro appreciation.

Geopolitical risks—Don’t overlook geopolitical developments, as they can trigger risk aversion and dollar inflows, depressing the euro.

In summary, the euro’s investment outlook over the next five years depends on your time horizon and risk tolerance. Short-term investors may wait for further pullbacks to build positions gradually. Medium-term investors can consider shorting the EUR/USD at high levels or buying at lows. Regardless, closely monitoring economic data and policy developments remains essential.