As the Euro continues its freefall against the US dollar I have received a number of requests for some longer term thoughts as many people bought into the Euro at its peak and now have to decide whether to hold on or bail out. This answer sums up the position for many.
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The speed and fall in the euro dollar are unprecedented as US banks, funds and corporations are desperately trying to recapitalize and prop up their own institutions and therefore repatriating vast quantities of dollars. Carry trade unwinds have added to volatility and it has all been underpinned by the sudden realisation that it is not all sweetness and light in the eurozone. Indeed many have predicted that the entire euro experiment would not survive its first real test or recession – i am sorry to sound so gloomy. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-crisis-meltdown.html – although this particular journalist has, at times, sounded positively apocalyptic about the euro his views are still worth noting.
A look at the charts http://www.netdania.com/Products/FinanceChart/FinanceChart.aspx do indeed show that a fall back 1.16 is indeed feasible. This could coincide with a Democratic win in next week’s elections. Broadly speaking a democratic win has always been dollar positive while a win for the republicans has tended to be dollar negative. However, any fall back to this support level would probably be the start of a rally back up – possibly sometime in 2009 (i should have a better idea in by Christmas)
I would imagine your decision really depends on the timescale of your investment and whether you can wait for the exchange rate to turn or whether you simply want to bail out now in order to cut your losses.
If you do decide to hold onto your euro investment there are two other indicators which are worth looking at before taking any decision. The first is the dollar index – a sentiment indicator – at the moment its looking very strong (for obvious reasons). The second is an exchange traded fund code UUP which measures the performance of the dollar index and this too is looking bullish. Any fall back to $22 dollars would mean a reversal for the dollar and an advantage to you.
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