20 Years of Turmoil: How the Euro Exchange Rate Fluctuates Between Crisis and Recovery, Can It Turn Around in the Next Five Years?

As the world’s second-largest reserve currency, the euro has been in circulation since 2002, marking over twenty years of history, during which it has experienced multiple major economic and geopolitical shocks. From the subprime mortgage crisis to sovereign debt crises, from the era of quantitative easing to interest rate hike cycles, each turning point has profoundly rewritten the euro’s destiny. This article reviews the exchange rate evolution of the euro over the past ten and twenty years, while also assessing its investment potential over the next five years.

Four Major Turning Points of the Euro in the Past Twenty Years

First Turning Point: The Fall After the 2008 Record High

July 2008 saw the euro reach a historic high against the US dollar—1.6038. At that time, the US subprime crisis was spreading globally, seemingly threatening the euro, but initially, the market viewed the euro as a safe-haven asset. However, this peak was short-lived.

When the financial tsunami hit the European financial system, a chain reaction ensued: major banks exposed to losses related to subprime mortgage products, lending channels for businesses and consumers froze, and governments significantly increased fiscal deficits to rescue their economies. Although the European Central Bank implemented quantitative easing and negative interest rate policies to stabilize the market, these measures also contributed to euro depreciation. To make matters worse, shortly after the crisis, sovereign debt crises emerged in countries like Greece, Ireland, Portugal, Spain, and Italy, raising doubts about the sustainability of the eurozone’s large economic system. From the 2008 high to the peak of the euro debt crisis in 2012, the euro depreciated by over 30%.

Second Turning Point: The Oversold Rebound in 2017

After nearly nine years of a prolonged bear market, the euro against the dollar hit a low of 1.034 in January 2017, then began to rebound. This shift was driven by multiple converging factors:

Policy level: The negative interest rates and quantitative easing measures by the ECB started to take effect, and eurozone economic data improved—unemployment fell from a high of 10% at the end of 2016, and manufacturing PMI broke through 55, signaling economic acceleration.

Political level: The 2017 elections in France and Germany favored pro-euro parties, and Brexit negotiations between the UK and the EU gradually became more rational, reducing uncertainties. Meanwhile, the new US administration’s policy uncertainties increased, prompting some capital to shift into euro assets seeking relative safety.

Technical level: The euro had fallen more than 35% from its 2008 high, with most bearish fundamentals exhausted, and the oversold condition laid the foundation for a rebound.

Third Turning Point: The Short-term Peak and Retreat in 2018

In February 2018, the euro rose to 1.2556 against the dollar, reaching a new high since May 2015. However, this high was short-lived.

The Federal Reserve began a new cycle of rate hikes in 2018, strengthening the US dollar index and exerting downward pressure on the euro. Meanwhile, eurozone economic data cooled—growth in Q4 2017 peaked at 3.1%, and manufacturing PMI retreated from its peak of 60. Italy’s political instability (the coalition of Five Star Movement and Northern League triggering EU budget disputes) also dampened investor confidence. This period marked a turning point where the euro shifted from a rebound to a correction.

Fourth Turning Point: Reaching a Twenty-year Low in September 2022

In September 2022, the euro fell to 0.9536 against the dollar, hitting a twenty-year low. Safe-haven flows due to the Russia-Ukraine war, Europe’s energy crisis, and soaring inflation pushed the euro to the bottom.

However, the momentum for a rebound was brewing— the ECB continued to raise interest rates in July and September, ending an eight-year era of negative rates; the Russia-Ukraine conflict became more stalemated, easing risk aversion; natural gas and oil prices retreated from their highs, reducing energy costs. These factors supported a gradual euro rebound in the second half of the year.

Present and Future: Is There Still an Opportunity for the Euro in the Next Five Years?

Economic Fundamentals Remain Weak

The eurozone’s economic growth momentum remains sluggish. Although unemployment continues to decline, actual growth rates are near zero, with aging industrial structures and ongoing geopolitical tensions. The latest manufacturing PMI fell below 45, indicating a weak economic outlook for the coming half-year. In contrast, the US economy shows stronger resilience, exerting structural pressure on the euro.

Monetary Policy as a Key Variable

By the end of 2023, the Fed has signaled the possibility of rate cuts, indicating an upcoming easing cycle. Meanwhile, the ECB remains cautious about ending rate hikes, at least in the first half of the year, and is unlikely to shift aggressively. This policy divergence benefits the US dollar in the short term, but historically, within 3 to 5 years after the start of US rate cuts, the dollar index tends to decline significantly, which in turn favors a rebound in the euro.

Risks and Opportunities Balance

If the global economy maintains moderate growth over the next five years, the Fed proceeds with rate cuts as expected, and no major financial crises occur, the euro could bottom out in the first half of 2024 and gradually strengthen until the ECB significantly cuts rates. The euro against non-US currencies like HKD will also benefit from a relatively strong euro.

Conversely, if major geopolitical events occur or the global economy sharply deteriorates, capital will flow back into the US, boosting the dollar and putting further pressure on the euro.

Investor Strategies

The performance of the euro over the next five years will depend on the interplay of three key factors: whether the eurozone’s economic growth can recover steadily, whether the ECB can flexibly adjust its policy pace, and whether the global economic environment remains as expected. Investors should closely monitor eurozone employment data, inflation trends, manufacturing activity, and the timing of the Fed’s policy shifts. Once the Fed begins to cut rates while the ECB remains relatively stable, the euro’s upward cycle will likely commence.

In short, the euro has experienced a long-term adjustment since its 2008 peak, with the 2017 oversold rebound and the 2022 twenty-year low reflecting its structural challenges. However, against the backdrop of gradually realized global rate cuts, the euro still has a chance to rebound in the next five years—key to this is seizing the policy cycle transition points.