Could the euro outperform the US dollar for the remainder of the year?

Could the euro outperform the US dollar for the remainder of the year?

The potential is certainly there – at least according to Axel Merk. And after reading his argument as to why the euro could outperform the dollar, one can also see why it could do so over the long-term.

Merk believes that last week’s speech from Mario Draghi was overlooked by investors. He believes that Draghi took much of the tail risk out of the Eurozone, while at the same time forcing tighter fiscal integration. Given the beating the euro has taken over the last 9 months, this new initiative by Draghi could be the launching pad for the struggling currency. As Merk stated, in regard to Draghi’s initiative “He did it all while keeping the ECB out of some political minefields. It's pure genius. The initial market reaction suggested he might have lost a battle, not realizing that he is winning the war.”

Merk has established a position in the euro given the Draghi initiative and also the very likely possibility of short covering. Draghi stated last week that he would keep the euro together and do whatever it takes to follow-through on that promise. Clearly Draghi has confidence in the euro for reasons perhaps unclear to the average investor.

Merk explains that Draghi is now taking on the approach of the Fed (just as we explained in last weekend’s newsletter). The fiscal reform by governments in Europe (Ireland, Spain, Italy, Greece to name a few) hasn’t been enough for the currency to regain strength. So, in light of that, the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) have been put in place. Access to these safety nets for struggling countries comes with a big price tag. Access to the funds provided by the ESFS and ESM are given at the cost of a nation’s sovereignty. If these funds are tapped, the countries’ budgets are now under the control of big brother – a measure ultimately influenced by the ECB. However, Draghi doesn’t have to get involved in the politics of the Eurozone because he isn’t technically in charge of the ESM of ESFS.  Merk explains “that’s exactly what a United States of Europe needs: tight fiscal integration. While access to the bailout facilities reduces the immediate cost of borrowing, it may also shut the door to selling bonds in the markets at palatable cost.”

Click here to read Merk’s entire article.