Rather than being considered a refuge, the dollar has increasingly been seen as a troubled currency, thanks in part to the poor U.S. fiscal outlook.
But many factors went into the wrong calls on the euro against the dollar. For starters, analysts underestimated the degree to which the European Central Bank would support the bond markets and banks of Greece, Portugal and Ireland. The rest of Europe's economy, meanwhile, proved much more resilient than expected, in large part thanks to strong export growth out of Germany and other so-called core euro-zone countries. At the same time, Spain, whose large economy many worried would tip the euro zone into free fall, has taken steps to shore up its finances.
Meanwhile, the U.S. economy has turned out to be much weaker than expected, last year flirting with a double-dip recession. This time last year, expectations were that the Federal Reserve would likely raise rates long before the ECB. Instead, the Fed launched an unprecedented second round of quantitative easing, pumping money into the financial system through large purchases of bonds and pledging to keep interest rates low for an extended period. Then, earlier this year, the ECB raised rates, and it is expected to tighten again this summer.
The euro has also picked up support from China, which, as officials there did last week, repeatedly pledged to continue buying euro-zone debt. Moreover, in addition to China, managers of other countries' foreign reserves were adding to euro holdings as part of a gradual diversification away from the dollar, analysts said.
The result was that, for all of the euro zone's problems, the dollar was in worse shape. "It was a race to the bottom," says Deutsche Bank's Mr. Ruskin. While working at a different bank last May, Mr. Ruskin predicted the euro would fall to $1.1650 by the end of 2010; instead it finished at $1.33. "So far, the dollar has been winning that race," he says.
And as for Quantitative Easing, one Euro analyst :
was arguing the euro needed to fall to parity with the dollar in order to make peripheral economies like Greece more competitive.
Mr. Galy recently joked that he had been told by a student in a class he teaches that the parity call had been a contrarian signal to buy euros. "We made one fundamental mistake in judgment, which was basically Fed policy," Mr. Galy says.