Mendoza School of Business

Euro Rate Doesn’t Suggest Break-Up

Published: December 16, 2011 / Author: Mendoza College

The following is an excerpt from an article by Reuters that quotes Finance Professor Jeff Bergstrand on the Euro’s value. To read the entire article visit: Euro Rate Doesn’t Suggest Break-Up

Bad as things seem for the euro zone, the value of the euro does not suggest investors are betting Europe’s currency bloc will fall apart.

Even in the wake of its recent slide, the euro at $1.30 is far from levels that would reflect fear of a break-up.

That level is more like a staggeringly low 92 U.S. cents, estimates Nomura Securities International, and only a slide near there would suggest the market is truly questioning the currency’s existence.

A look at the euro’s history suggests the currency is not yet in a danger zone. Since its inception at $1.17 in January 1999, the euro has traded between $0.8225 and $1.6038, according to Reuters data, as the currency fell sharply not long after its introduction.

The current price around $1.30 is well above the mid-point of its historic range. The average level is about $1.20, based on daily New York closes going back to 1999. A move to that level could take time. It took three months of back-and-forth trade for the euro to get from $1.40 down to $1.30.

That does not mean the euro’s current rate is a resounding vote of confidence. It’s just that many believe the costs of a split would be so high that Europe’s leaders will pay any price to prevent it — even the European Central Bank, which so far has been reluctant to support troubled euro debt markets.

Jens Nordvig, a currency analyst at Nomura Holdings, said the ECB would eventually take the decision to provide more support, “probably towards the end of the first quarter.”


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