The Dollar-to- Euro Exchange Rate Gives You an Opportunity for Profit or Protection 
© Shane Flait (2012)

The dollar has been on a roller coaster ride relative to the euro since 2007. Maybe you can make use of it for your portfolio for either profit or protection. Predicting the exchange rate fluctuations of the dollar-to-euro may not be so difficult. Here’s what’s been happening… 

The dollar and the euro are two of the three major world currencies; the third is the yen. They represent the three biggest economies. China is creeping up, but running into a few problems now. The euro, of course, is the currency for the countries that make up the European Union.

The roller coaster behavior of the dollar to euro

The exchange rate between the dollar and the euro has been on a roller coaster since 2007. We can let the exchange rate be simply the amount of dollars required to buy one euro. The average cost of a euro since the beginning of 2007 has been about one and a third dollars ($1.33). It’s January 2012 as I write this.

The dollar is considered weak – relative to the euro – if it cost more dollars to buy one euro. If the price of the dollar falls, then the dollar is becoming stronger (relative to the euro).

But the actual price has fluctuated about this average in a nice (predictable) roller coaster fashion. It has worked itself methodically to a high and then back to a low three times since the beginning of 2007. Refer to the graph.

Each cycle from peak to peak (or low to low) takes about 1½ years. Exploring this rolling cycle, it starts at $1.33 (January 2007) and works its way to a peak of $1.55 (March 2008). Then it heads to a low of $1.27 (November 2008) and then back to a high of $1.50 (October 2009). From there it heads to a low of $1.26 (May 2010) and then back to a high of $1.43 (July 2011). As of now (January 2012) it’s headed to a current low of $1.29.

A predictable trend

You can see that the exchange rate swing from a low (say $1.27) to a high (say $1.50) represents almost a 20% decrease in the value of the dollar – relative to the euro – and it takes about 6 months to a year to accomplish it. That’s true for the reverse trend too.

Nothing is guaranteed but this trend seems to be somewhat predictable. And with a 20% change in the rate, you can probably make some money – or preserve the value of what you have - if you will simply follow the trend. And how can you do that?

 If you own dollars, then exchange them for euros when the dollar is strongest – at its lows (the $1.27 area) when you need the least dollars to buy a euro. Or if you have euros, sell them when you can get the most dollars – at the highs (the $1.45 area) – for each euro you sell. And, of course, you do either of those options since you believe the trend will continue in its cyclical trend because of its past behavior. You can wait a little beyond the peaks or lows to take your action so you can see the reversing trend taking place.

And why should the cyclic trend continue…because the U.S. and the E.U. don’t want their currencies to get too expensive or too cheap relative to the others. They do a lot of business – trading and tourism – between each other. So if their financial policies start pushing their currencies too high or too low, they will take action to alter their policies and even purchase or sell their currency for the other’s to keep them in the ball park of about one and a third dollars per euro. 

Both the dollar and the euro have been wracked with debt problems over the last few years with the financial crisis that began with realization of so many toxic investments (bundled mortgages). But the cyclic trend has maintained itself through it all.

Good luck and be careful. Don’t go overboard on any investment.

 

 

 

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com