Euro versus the Dollar - All Hype and No Change

Last Updated Jun 7, 2010 9:43 AM EDT

Since the Euro was launched in January 1999, it has generated more than its fair share of buzz in the finance world. In the thousands of articles written, and in the perception of millions of investors, opinion of the Euro ranges from believing it's the world's currency of choice to replace the dollar, to recommending it be avoided at all costs. Yet for all that buzz, what happened in the long-run was a whole lot of nothing.

The Euro is a common currency used by 16 European countries and more than 300 million people. In 1999, the Euro would buy US $1.18. As of June 4, 2010, each Euro will now buy (drum roll) US $1.1971, which represents an increase of only 1.4% over more than 10 years. The Euro reached a high of nearly US $1.60, and a low of just over $0.82 during this period, but now is right back where it started.

No change doesn't mean no losses
Though the Euro didn't change much during the period, that doesn't mean the fortunes of investors didn't. In fact, investors lost a bundle. Wall Street found a new way to separate you from your money with managed futures. This hot little number allowed us to make bets against the Euro during the bear stock market periods, and bet on the Euro during bull stock market periods, when the experts were predicting the demise of the dollar. In the end, nothing changed except the fact that large management fees were charged for what will always be a zero sum game.

Losses on the Euro occurred as a result of U.S. investors going into international stocks. As is typically the case here at home, U.S. investors performance chased their way across the continent of Europe, hopping on to whatever was skyrocketing, and hopping off on the ride down. Much of the performance has to do with short-term currency fluctuations. While they may not know it, investors are buying Euro based stocks when the currency is high and selling when it is low.

In short, investors used recency bias to buy high and sell low in a market that barely budged over the entire period.

My advice
Just say no to managed futures on currency or any other commodity futures, for that matter. In the long run, major currencies tend to remain far more stable than the wild short-term fluctuations. Invest in international stocks for the purpose of diversification and not because you think the Euro or any other currency will dominate against the dollar. If you pick a target and then rebalance, you are far more likely to be buying the foreign currency when it is weak against the dollar and selling it when it is strong.

If you do want to gamble on foreign currency, at least do the opposite of what the media hype is telling us.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.