The Euro slid back below $1.40 in New Year’s Day trade as some analysts predict a dramatic slump for the… … European Union currency in 2009. Italy has announced that it may look to get out of its tie to the Euro as its currency of use if regulations continue that restrict the country’s control over money flow. The possibility of a lost member of the Union caused speculators to drive the Euro back below $1.39 in mid-day Asian trade after it opened New York near $1.42 Thursday morning.

Saxo Bank, which has demonstrated a reasonably competent ability to assess currency market conditions, predicts the Euro will drop to around 95 cents during the first part of 2009 before rebounding toward $1.30 later in the year. The Euro has been quite volatile against the dollar since the middle of 2008 after hovering near $1.30 for several months earlier in the year.

The potential drop of the Euro in the coming months is largely anticipated due to banking struggles in Europe. Many of the financial sectors and credit markets in European Union countries are hurting as badly, or worse, than US markets.

Additionally, analyst consensus forecasts suggest that oil will continue to fall to a bottom near $25 per barrel. This price point seems quite remarkable, but falling oil has helped the dollar in its push against the Euro and the British Pound, which is only worth $1.46 at the current market. One Pound fetched $2.06 in early 2008.

It is not just struggles in Europe that could affect that Euro-dollar ratio. Though holiday hope and New Year’s cheer could be to blame, many real estate and credit experts have expressed more positive sentiments about chances for a 2009 economic recovery. Some leading housing market entities have suggested that a rebound for the housing market could develop by mid-2009. Of course, since the recent Case-Shiller home price index showed a drop in all 20 cities in the index, there are no guarantees.

The good news for the greenback is that if major US financial markets and other sectors that have struggled mightily in the recession can recover in the first half of 2009, the dollar should be a major benefactor. Therefore, a strong dollar and a weaker European economic picture are also favorable to the dollar versus the Euro.

A stronger dollar would likely be seen as a positive economic development by most Americans if for no other reason than it would help establish a sense of stability. A stronger dollar would also help companies that operate globally who want to invest in foreign markets and investments.

A drawback to the dollar rapidly gaining strength against the Euro is that it makes it tougher for European companies to invest in US markets, which can be detrimental to business growth and development. Foreign travel to the US and other expenditures by Europeans would also likely be trimmed if their Euros were only worth 95 cents. Such a ratio makes American products and services relatively expensive.

One group that should be happy if the Euro does make the swings forecast by Saxo and others is currency speculators. Thirty to 35 pip movements back and forth in a year creates excellent short-term and medium-term gain opportunities.

Market Recap

Stocks closed out 2008 on a strong note. The Dow climbed 108 points on the final day of trade for the year. Optimism reigned as investors hope for a fast recovery in 2009. Oil hovered in the high-$30 price range. The dollar has held firm against the Euro, British Pound and yen in recent days. US financial markets were closed Thursday for the New Year holiday.

Neil Kokemuller
Thursday, January 1, 2009
11:07 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.