Aug 12, 2020 - Economy

Investors are betting the future is priced in euros

An illustration of a crumbling dollar

Illustration: Aïda Amer/Axios

It's the euro's time now — at least that's how investors have been positioning recently.

What's happening: Speculators have raised their bets to the highest in nine years that the dollar will fall and increased bullish bets that the euro will rise to the highest level on record, Reuters reported citing data from the CFTC.

Driving the news: More money is flowing into the euro and euro-backed assets, including European stocks and bonds, as eurozone countries are seen bouncing back thanks to an $882 billion relief package passed by eurozone leaders and falling COVID-19 infection rates while the U.S. continues to struggle.

The big picture: “This is not a matter of growth this year or next year or predictions about the cycle — it’s really something more structural,” Nicolas Véron, a senior fellow at the Peterson Institute for International Economics, told Bloomberg.

  • “The budget deal changes the way financial markets look at the eurozone in a significant way."

By the numbers: The S&P 500 has outperformed the pan-European Stoxx 600 significantly, returning 3.2% year to date versus a 6.5% decline for the Stoxx, and 206% over the last 10 years vs the Stoxx's 33% gain, per FactSet.

  • The ZEW survey of economic sentiment in Germany, the eurozone's largest economy, rose to 71.5 from 59.3 the previous month. That was well above a forecast for 58.0 in a Reuters poll of economists, and the best reading since 2003, according to currency analysts.

The state of play: Analysts at the BlackRock Investment Institute announced they were raising their holdings of European equities to overweight, citing "the region’s robust public health infrastructure and a galvanized policy response."

  • "The different restart dynamics in the U.S. and Europe have also pressured the dollar, underscoring our preference for European equities and caution on U.S. stocks," they note.

Yes, but: The euro's 11% jump against the dollar since May has some in the currency market urging caution, as the last time investors packed into the euro like this in 2018 the market reversed and the dollar took flight against the continental currency.

  • Tuesday's market action may have been a preview as the greenback rose against most currencies. That was largely due to a reversal-of-risk appetite after Senate Majority Leader Mitch McConnell said negotiations in Congress on the next U.S. stimulus package had stalled.

The bottom line: Even though the U.S. is creating much of the global turbulence with rising trade tensions and an impasse on stimulus talks, the dollar likely would strengthen from safe-haven flows if risk appetite dries up again.

Go deeper