(02/01/12) Investors Need to Watch the Euro

Investors Need to Watch the Euro

02/01/2012 6:30 am EST•2 min read

As stocks have climbed, so has the euro, despite the dire forecasts late last year. MoneyShow's Jim Jubak explains here why you should keep an eye on the euro in the coming week.

I suggest you watch the dollar-euro exchange rate.

When everything was going down and the market was really, really shaky, the euro looked like it was going to plunge right through $1.25, to $1.20, to $1.15—hey, people were even talking about parity with the dollar. One of the things that has happened as the rally unfolded in late December 2011 and early January 2012 is you can see confidence returning to the market, because people were feeling better about what was going on in Europe and the euro was climbing.

So right now, you’ve got $1.31 to the euro. So that’s really sort of a good indicator of where we are. When the euro is healthy against the dollar and high against the dollar, it means there is more confidence in the market.

You’ve got sort of what we call the risk-on trade. Global markets go up in places outside that. US stocks go up. Everybody is happy. When the euro is going down, it is an indicator of more worry.

Now, I think what we’ve got to do is look and see at the end of the month, January 2012 into February 2012, whether we keep going up on the euro—at some point, we get pretty close. At $1.35, we’re at the top of the range. It’s hard to imagine the euro going much above that.

That’s also an indicator of whether this market might start to get overextended, so I keep my eye on that. It’s a really good indicator of fear in the market right now. Watch the euro. Watch the dollar.