The Euro is Dramatically Overvalued

Everybody seems to be falling in love with the Euro these days, driving to a recent high of 1.36 dollars to the Euro. The reasons for this strength (and that of the British Pound) are clear - it is not the dollar and Warren Buffett and George Soros seem to have turned into dollar bears. Well, the traders are getting a little carried away here. They are treating it as a commodity, but it is a currency and one tied to an economic area with a lot of problems. Currencies ultimately revert to a level based on purchasing power parity and some expectations of future interest rates in the zones where they operate. When they launched the Euro in 2000, it was designed to trade at about USD 0.90 to USD 0.95 and that strikes me as continuing to be roughly the area where purchasing power parity is achieved between the Euro and the dollar. Longer term interest rates in the US appear to be on the rise in the US and not in Europe. Now, will the Euro go still higher in the short term? Maybe. But, to those considering buying foreign currencies (and especially the Euro) at this stage in the cycle, I'd suggest that you'd be better off holding onto your dollars and dollar denominated assets.