Going to Europe or England this summer? Trade your dollars now.

Or so says this WSJ article. It’s probably also a good time to book, and pay for, a St. Bart’s villa, if you’re lucky enough to have that in your budget. I alas, do not.

In 2007 some very clever people, who foresaw the coming economic crisis, assured me the dollar was bound to collapse as a result. Instead, when the crisis hit, it boomed.

So why do I feel differently right now?

It’s not because I pretend to know what Germany’s Angela Merkel or Great Britain’s Mr. Cameron is going to do next. It’s because currency market data show the speculators are already heavily net short of both the euro and the pound. They’ve been betting more and more heavily against both currencies all the way down.

According to an analysis by Danske Bank, those net short positions are now at extreme levels.

And in the markets that tends to be bullish news. After all, if everyone is short, who is left to sell more?

Both currencies have already fallen a long way.

Since the start of the year the pound has slumped from $1.61. As recently as late 2007 it was above $2, meaning to a U.S. visitor British prices have come down since then by nearly 30%.

The euro has fallen to just $1.27 from $1.44. Two years ago it was nearly $1.60.

These moves should come as no surprise if you follow how financial markets work. Big money investors fear uncertainty. And Europe has given them plenty of it.

Britain had a nail-biter of a general election, followed by a political vacuum. The eurozone faced sovereign debt crises in Greece and elsewhere–combined with grave doubts over whether it had the political will, or structures, to deal with them.

Of course anything can happen, and currencies can move in any direction from here. Furthermore, if the exchange rate reflected purchasing power, the euro would probably fall all the way to about $1.10.

But if you had to pick a good time to buy euros or pounds, you’d probably look for a moment when they had already been driven down a long way by uncertainty and speculative bets. Like now.

5 Comments

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5 responses to “Going to Europe or England this summer? Trade your dollars now.

  1. Retired IB'er

    There are two issues at work here: near term vs. medium term.

    The near term $ to Pound to Euro may be over sold (though I’m not convinced), but IMHO, longer term the Pound and Euro have more to drop relative to the $.

    YMMV…

  2. Anonymous

    Staycations are ultimate choice of value conscious

  3. Pierre Bergé, Nom de Plume

    Cher Chris, s’il vous plaît venez me rendre visite à Paris. Je vais vous montrer la Tour Eiffel. Pierre

  4. out looking in

    I picked up Sterling last time it traded down under 1.40 against USD (Feb 09) and was quite pleased with results…that has pretty much been the floor for the past thirty years. I suspect it will hold again. I agree with IBer, the euro is a different animal and short term, it should bounce (from ECB intervention). But i too don’t see investment value until perhaps parity or lower. Still prefer Asian currencies (ex-Kiwi)

  5. greenmtnpunter

    Ya think Soros is reprising ’92 by shorting the pound? And the Euro this time? What good has this manipulator ever done other than feather his own nest? David Horowitz’s The Shadow Party is an interesting read on Soros and how he has taken over the Democrat Party.