Can the Euro make a comeback in the next 5 years? Three major turning points from the 2020 exchange rate trend chart

As the world’s second-largest reserve currency, the euro has been in circulation since 2002 and has experienced three major crises that could rewrite financial history—the 2008 subprime mortgage storm, the subsequent European debt crisis, and recent energy crises. Each time, the market has asked the same question: Is the euro still worth investing in?

Rather than waiting for an answer, it’s better to look at what history tells us. By analyzing the euro’s 20-year exchange rate chart and key turning points over the past 10 years, we can find investment clues for the next five years.

Three Landmark Moments in the 20-Year Euro Exchange Rate Chart

The 2008 Peak: The Bubble Behind 1.6038

In July 2008, the euro hit a historic high of 1.6038 against the US dollar, then began a long decline.

This peak was not a sign of strength but an illusion on the eve of crisis. The US subprime mortgage crisis triggered a chain reaction—large financial institutions’ assets evaporated, banking systems came under pressure, and credit markets froze. The distant-looking Wall Street storm quickly spread to Europe.

European banks sold assets to cut losses, companies and consumers faced financing difficulties, and economic growth sharply declined. To stabilize the market, the European Central Bank(ECB) was forced to shift from rate hikes to rate cuts and quantitative easing, directly weakening the euro’s purchasing power. Worse, the crisis exposed Europe’s structural problems—high debt levels in Greece, Italy, Spain, and others, with the “PIIGS” label once causing investor fear.

The financial tsunami’s impact on the euro was not just short-term exchange rate decline but a deeper loss of confidence.

The 2017 Rebound: Valuation Discount Offers a Turnaround Opportunity

In January 2017, after nearly nine years of continuous decline, the euro bottomed out and rebounded around 1.034.

A seemingly calm month concealed four driving forces:

Improving economic data: Eurozone unemployment had fallen below 10% by late 2016, and the Purchasing Managers’ Index(PMI) for manufacturing broke through 55, indicating a clear uptick in industrial activity. These signals told the market—Europe is truly recovering.

Political shift towards friendliness: 2017 was a big election year in France and Germany. Markets expected moderate pro-EU candidates to win, stabilizing EU political winds. Meanwhile, Brexit negotiations had just begun, uncertainty had not fully released, but worst-case scenarios had been digested.

US policy uncertainty: Trump’s rise brought policy unpredictability, and global capital doubted the US outlook, with some hot money shifting to relatively safe euro assets.

Ultimate reason—oversold rebound: Compared to the 2008 high, the euro had depreciated over 35%. Years of loose policy expectations had been priced in, and after negative news was exhausted, a technical rebound became inevitable.

The September 2022 Low: New Problems Revealed

In September 2022, the euro hit 0.9536, the lowest level since the 2008 financial tsunami.

This decline was driven by different factors than before. The Russia-Ukraine war erupted, Europe’s energy supply plunged into crisis, natural gas prices soared, industrial costs skyrocketed, and recession fears loomed over the continent. Meanwhile, the US Federal Reserve aggressively raised interest rates, with the dollar index reaching a 20-year high, exerting absolute pressure on the euro.

But a turning point was also brewing: the ECB continued rate hikes in July and September, ending eight years of negative interest rates. As energy prices gradually eased and risk aversion waned, the euro rebounded from around 0.95.

The Next 5 Years: Can the Euro Regain Its Uptrend?

To forecast the euro’s future, three key variables must be monitored.

Variable 1: The US Federal Reserve’s Rate Cut Cycle

This is the most critical. The US has signaled rate cuts starting at the end of 2023, with expectations of entering a rate-cutting cycle in 2024. Historical experience shows that each time the Fed begins a rate-cut cycle, the US dollar index tends to decline significantly over the following 3 to 5 years.

In comparison, the ECB has been more cautious about ending its rate hike cycle, maintaining relatively high interest rates, which in turn supports the euro’s attractiveness. Once the dollar weakens, the euro’s appreciation potential naturally opens up.

Variable 2: Where Is the Bottom of the Eurozone Economy?

Manufacturing PMI has fallen below 45, indicating a short-term pessimistic outlook. But this also means negative expectations may have been largely priced in. As long as a systemic financial crisis does not occur, the eurozone economy is likely to bottom out within the next 12-24 months, supporting a subsequent exchange rate rebound.

Structural aging, geopolitical normalization risks still exist, but these are now Europe’s “new normal,” and investors have become accustomed to pricing them in.

Variable 3: Geopolitical Black Swans

The Russia-Ukraine conflict continues but has not worsened, becoming a scenario the market can bear. If a larger-scale conflict suddenly erupts, capital will likely rapidly flee to the US dollar. This is the greatest uncertainty for the euro’s upward trend.

Practical Investment Insights

Over the past 20 years, the euro’s chart has depicted a cycle from frenzy to despair, then to slow recovery. This cyclical pattern reveals several truths:

First, the euro will not die, but patience is needed. Each crisis is followed by a rebound, but the rebound cycle can last 3-5 years.

Second, economic data is the best compass. Changes in unemployment, PMI, and inflation often lead exchange rates by 3-6 months. Paying close attention to these indicators is more effective than guessing central bank intentions.

Third, the strength or weakness of the dollar determines the euro’s ceiling. When the Fed cuts rates and the dollar index weakens, euro appreciation tends to be systemic rather than short-term volatility.

In summary, the euro will face pressure in the first half of 2024, but if the Fed begins rate cuts as expected and no major financial black swan occurs, the euro is likely to resume an upward trend in the second half. Over the next five years, the potential returns from euro investments far outweigh the risks—provided you can endure medium-term volatility and tests.