The National Association of Manufacturers, the lobbying group for US manufacturers, says they figure the equilibrium level for EUR/USD is somewhere between 1.20 and 1.25. I think that’s very close to the mark.
1.21 is roughly the 50% retracement of the lifetime range for the euro. The euro was launched in 1999 around 1.18. Coincidental, the 200-month moving average, a span of some 16 years, comes in at 1.1750. Over those sixteen years we have seen German reunification, the Asian financial crisis, the introduction of the euro itself, the dotcom bubble, the housing and commodities bubbles and most recently the global bank bailout.
Using these data points, I’d put fair value between 1.15 and 1.25. Keep in mind, the markets have no regard for the concept of “fair value”. As we saw earlier this summer, FX markets can overshoot to dramatic extremes.
