This Currency Oddity Is About to Get Crazier

What blew me away on my first visit to Europe wasn't the views or the history...

It was the cost.

Eight years ago, I spent two weeks traveling the Italian countryside. It was beautiful. The food was amazing. And I still have crystal-clear memories of the trip.

Unfortunately, my timing couldn't have been worse. It was the spring of 2014. And the euro was finishing up a two-year bull market... one that made my dollars worth about 15% to 20% less than they would have been before the boom.

The exact opposite is happening today. The euro recently did something that no one would have thought possible just a few years ago. But according to history, things could get crazier before turning around.

Let me explain...

The euro as we know it came into existence in 1999. Before then, every European country used its own currency. It made it a nightmare to do business from country to country... or even to travel within the continent.

The euro solved the problem. It ultimately became the only currency for more than a dozen countries. And aside from its first few years of existence, one important fact always held true...

A euro is always worth more than a U.S. dollar.

Of course, the values aren't fixed. But this has been true since 2003. Take a look...

One euro was worth between $1.20 and $1.60 from 2004 to 2014. It has ranged from $1.10 to $1.20 since then. But the currency still maintained a premium to the dollar.

That is, until recently... when the euro fell below the dollar on August 22. And the euro's worth in dollars fell as low as $0.96 in late September.

After such an unexpected move, it would be easy to assume that the euro will rally soon. And it has bounced slightly in recent days. But ultimately, the euro could go much lower.

The reason is sentiment...

You see, futures traders, surprisingly, aren't that bearish on the euro. That's based on the Commitment of Traders ("COT") report.

The COT shows us futures traders' real-money bets. It's a useful contrarian tool at extremes, when speculators are all crowding in on a trade. But again, as you can see below, we're not there yet...

I looked at every time the euro's value bottomed since 2010. In each case, speculators bet against the currency to an extreme level.

Those were contrarian signals. Though the levels of pessimism vary, they're all much lower than today's reading. That means sentiment likely hasn't bottomed yet.

There's no guarantee, of course. But according to history, the euro could slide further from here before sentiment washes out... and the trend reverses.

Again, that's not what you might expect, given the major decline we've already seen. But history shows this situation will likely get crazier from here.

In the meantime, if you're itching to travel, a European vacation is the cheapest it has been in recent years. And it'll likely be an even better deal in the months to come.

Good investing,

Brett Eversole

Further Reading

As the Federal Reserve hikes rates, it raises the relative strength of the dollar. This is important – because for investors waiting on a stock market turnaround, the dollar's strength may be one signal to watch... Read more here.

Stock market sentiment has tanked this year. The investment "pros" are now more bearish than they've been in decades. But in the past, after times like these, stocks have soared dramatically... Get the full story here.