Today's comment is by Jack Crooks, Currency Director and editor of Crooks on Currencies and Crooks Currency Options.
Blame your mom for missing a few good trades here and there - I know I do.
You see, I was raised on my Mom's never-ending need to search for bargains. So it's sometimes a struggle in my adult life for me to do as legendary trader Jesse Livermore instructed - buy high and sell higher!
My friend and colleague, Mike Burnick, refers to this as the "value trap." Right now, many who want to buy the euro are stuck there.
Let's look at some good reasons why the euro can go higher still against the dollar.
First a "value trap" definition is in order. A "value trap" is simply when an asset is trading either "seemingly" very high or low for a reason. And even though it's already trading high or low, this particular trade could still move a lot higher or lower.
(In other words, just because a stock or currency is already trading in overshoot territory that doesn't necessarily mean it's headed in the opposite direction anytime soon.)
The need to search for value is what snares you in the "value trap." You must constantly ask yourself - am I missing something? Why could this particular stock, bond or currency trade higher even though it's already in nosebleed territory?
I think there are two strong fundamental reasons why the euro can go higher - maybe to 1.40 and beyond. It's at 1.38 now.
You won't hear these reasons bantered about on CNBC . I guess because it takes a little more than a sound bite to grasp the relationship, so please bear with me...
Skyrocketing Oil Prices = Good News for the Euro
The first reason is that a rising euro may not be as big a drag on European growth as expected. That's because of its relationship to oil prices.
As you know, crude oil prices are soaring. But crude is priced in U.S. dollars. And because the value of the euro is also soaring against the dollar, the relative cost per barrel of oil in euro vs. dollar is less. In fact, according to analysis by Morgan Stanley, the price of Brent crude oil in euro terms averaged €52.80 a barrel over the last three months, not significantly more than the average price of €51.90 in all of 2006.
This means European business and consumers don't spend as much of their income on energy. This frees up consumers to spend their euros on other goods and services that drive the economy.
Then there's the view of oil producers i.e. OPEC. These oil producers understand very well that their key asset, oil, is priced in dollars. And U.S. dollars are a dwindling asset.
So, it only makes sense for them to invest a greater share of their U.S. dollar earnings, which are soaring, into an appreciating currency - the euro. Therefore, it might be fair to say that rising oil prices tend to lead to a higher euro.
Euro Exports Actually Infuses the Euro
Also, the euro is not biting into euro exports as much as expected. This is partially explained by the fact that a large portion of euro-exports are traded country to country within the Eurozone itself - and as you know, most Eurozone countries have the same currency.
One big exception is the U.K. Of course, the U.K. still uses the pound, but the pound is also trading high, so the impact across the continent is muted.
In addition to this, there is an interesting trend happening in the global economy - more export specialization from Western economies.
As Western nations become more specialized with their export content, a given change in exchange rates is having less of an impact on exports in general. In other words, even though a rising euro would normally make European exports less competitive on world markets, the specialization of trade mutes this impact.
Right now we're not hearing industries or countries in the region voicing concern. I believe that in itself could be fueling this trend. If the rising euro were biting into exports, we would expect to see some organized protest somewhere - it really hasn't happened yet with the exception of some slightly negative remarks out of France - as usual.
So, is the euro too high to buy? As hard as it is for me to admit, the answer has to be no. Sorry Mom!
JACK CROOKS, Currency Director
P.S. My inside sources tell me that you will soon be able to trade the euro easier than ever before, right from your stock brokerage account. Click here to read all about it.