The Euro has been gaining ground against the Greenback lately as counter Dollar momentum has been gearing up. The Euro currency is considered by many as an alternative for the Dollar as it unites the largest concentration of stable democracies around one currency. For Investors a large stable democracy means economic stability .But at the current circumstances is the strength of the Euro justified?  

The Eastern European story-The euro zone has been greatly exposed to Eastern Europe and when emerging markets was the hottest investment story the Euro reached new highs against the greenback. However in current times when the tide has turned this exposure once the growth engine for Europe has quickly become a burden. Although the IMF rescue funds will assist the Eastern European countries it is highly unlikely it will stop the downturn. The real-estate market in the region that has been booming strongly for several years is currently flooded with property. Moreover all countries in Eastern Europe are highly leveraged and have heavy liabilities in foreign currency that creates not only downward pressure but substantial risk. It is highly reasonable to assume the economic outlook for Eastern Europe is exceptionally grim and will keep weighing on the EU as long as the global crisis unfolds.

EU Leadership lagging behind- The euro zone has long been divided on how to handle the crisis. In Japan the “lost decade” crisis has taught us that growth can be flat for a prolonged period and go into a freeze until vast amount of government stimulus is injected. However it seems the EU leadership keeps lagging behind the US and Japan in drawing the conclusions and has yet pulled out a serious economic plan. The EU leaders argue that a large scale stimulus is not responsible but what appears to be reasonable policy now can cost dearly in the future. In favor of budget discipline the EU leaders might sacrifice recovery and cause the euro economy to freeze.

ECB plans-The ECB has yet exposed the unconventional steps it will be willing to take. The Fed move just several weeks ago when it declared its intention to buy government debt in an unprecedented scale has proved Central Banks can still make game changing moves. As long as the measures and scale of measures the ECB intends to take is unclear it is somewhat difficult to price the Euro.

When investing in the Euro one must take into consideration the many tough questions looming over the Euro economy. When too many question loom price distortions tend to be created and the downward risk has a tendency to be realized

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