Rolls of euros and dollars © Getty Images

Pick your metaphor.

The tide has turned. The weather is changing. The momentum has shifted with a change in quarterbacks.

Anything works as long as it 1) describes the current reversal in strength by the euro against yen and U.S. dollar and 2) reminds us that the reversal is itself easily reversed and that we don't know much about the timing of the next reversal.

I prefer "tide" to describe the euro's comeback. It suggests not just the turn in the currency markets but a change in the flows that all financial assets swim against or with. The reversal in the relative strengths of these big three currencies will, after all, have an effect on everything from earnings at big U.S. multinationals such as IBM (IBM) and PepsiCo (PEP) to the price of commodities and commodity stocks to the balance of imports and exports in China to the growth rate of the Brazilian economy.

The biggest effect, though, is likely to be on the prices of stocks in emerging markets such as China and Brazil. If you're invested there, take note.

The big comeback

The euro had been in decline against the dollar and the yen since the end of February through July 24. After a rally through Oct. 17, it dropped again until Nov. 13. During those specific declines and during that seven-month period in general, money flowed into dollars and yen and into assets denominated in those currencies.

A rising dollar weighed on the price of commodities such as gold and oil. Japanese exporters found themselves at a painful disadvantage in selling their goods -- such as cars -- to European customers who weren't inclined to buy anyway as their economies slipped into recession. U.S. companies such as McDonald's (MCD) reported disappointing earnings as cheaper euros from sales by European units had to be translated back into more-expensive dollars.

Jim Jubak

Jim Jubak

For the week ended Dec. 14, the euro finished at $1.3163 against the U.S. dollar and the yen closed at 83.52 to the U.S. dollar. The euro rose 1.8% this past week to its highest level against the dollar since May 4. The yen dropped 1.3% against the dollar to hit its lowest level since March 21. The yen fell 3% against the euro to hit its lowest level since April.

How big a change is this? On Nov. 9, the euro traded at $1.2694 to the U.S. dollar. The low came on July 24, at $1.2089.

Despite the recent recovery, the euro is still down from its Feb. 28 high for 2012 of $1.3454. That, of course, suggests that the euro could move higher in the coming weeks.

What's behind the rally

It's not hard to see why the euro has rallied against the yen and the dollar.

It's, in part, because of positive developments in Europe. In the past week, eurozone finance ministers approved both the next big rescue payout to Greece and the first (and easiest) stages of what would be a European banking union. The first took the possibility of a Greek default/economic shutdown off the table. The second demonstrated, for the moment, that European leaders could make progress on their long-term agenda. Add in the lack of an interest-rate cut from the European Central Bank on Dec. 6 -- the bank kept its benchmark rate at a historic low of 0.75% for the fifth straight month -- and you've got support for the euro coming pretty much from all sides. (The negative news is that the eurozone economy continues to contract and the recession is both widening and deepening.)

Contrast the non-action by the European Central Bank with the stimulus from the U.S. Federal Reserve and the possible stimulus to come from the Bank of Japan.

On Dec. 12, the Fed announced that it would replace the $45 billion-a-month Operation Twist stimulus program, which expires at the end of the month, with $45 billion-a-month of outright buying of U.S. Treasurys. Add in the Fed's continuing program of buying $40 billion in mortgage-backed securities every month, and the Fed is committed to pumping $85 billion a month into the U.S. financial system.

And it's committed for a long time. Before last week's meeting, the Fed had said that it would keep short-term interest rates at their current 0% to 0.25% level until the middle of 2015. On Wednesday, however, the Fed said it would keep interest rates at that level until unemployment drops to 6.5%. On the current trend, that could keep rates at current levels until the end of 2015. And it's only logical to think that the Fed won't ease off on this $85 billion a month in quantitative easing until it sees signs that the economic recovery is sustainable at the current rate or better. Quantitative easing -- the Fed pumping money into the economy -- could be with us for quite a while.

In Japan, the opposition Liberal Democratic Party and its leader, former Prime Minister Shinzo Abe, scored a landslide victory in elections on Sunday, winning 294 seats (by a preliminary count) in the 460-seat lower house of Parliament. Abe had run on a platform that called for the Bank of Japan to begin "unlimited" buying of government bonds, with a goal of adding stimulus to the economy until inflation reaches 2%. Japan's economy shrank at a 3.5% annual rate in the third quarter and is expected to show a contraction again in the fourth quarter. The current inflation rate is near 0%. The Bank of Japan will either go with Abe's program -- adding massive stimulus to Japan's economy -- or it will resist the call from the political leader in order to preserve its independence, setting off a crisis. Either alternative will take the yen lower.

Clear skies in Europe, sort of

The Japanese election -- and the pressure it has put on the Bank of Japan -- could mean that country begins the New Year with a financial crisis. The United States is likely to begin the year in an analogous position, with politicians still locked in disagreement about how to fix the "fiscal cliff" created by the expiration of tax cuts and the imposition of automatic spending reductions that take effect after the first of the year. And then, of course, there's the fight over raising the debt ceiling. There’s nothing like the possibility of a replay of the last debt-ceiling battle, which raised fears that the United States would default on its debt and led Standard & Poor's to cut the country's credit rating to AA from AAA, to stir up confidence.

In contrast, the horizon seems relatively clear in the eurozone. Oh, none of the core problems have gone away or even been addressed seriously. But Europe's political leaders have kicked some of the big worries a long way down the road. For example, the recent Greek rescue deal and payouts have, potentially, postponed the next round of the Greek crisis until 2014. The country looks likely to receive enough cash to meet its needs until then. (The likelihood is, however, that when we all get to 2014, the Greek debt load will still be unsustainable and the Greek economy will still be both in contraction and uncompetitive.)

It's unlikely the eurozone will do anything but hold the fort until after the German elections in the fall. Anything that smacks of putting German taxpayers on the hook for more funds to bail out Greece, Spain or Italy could cost German Chancellor Angela Merkel at the polls. Her preference is for more talk from Mario Draghi and the European Central Bank, along with very little concrete action. And as long as the talk is sufficient to keep fear in check, that inaction is positive for the euro.

Of course, events might not cooperate with politicians' desires to do as little as possible. In Spain, the continued retreat of real-estate prices and the increasing inability of Spanish borrowers to pay (strange how not having a job makes it harder to keep up with the mortgage) keeps adding to the bad-loan problem at the country's banks. In Italy, the February elections could produce political deadlock or worse. (Surely now, another government led by the flamboyant Silvio Berlusconi?) Events in either country could force eurozone politicians into action and create, first, enough fear to send the euro back down, and second, some stimulus from the European Central Bank that closes the gap with the Fed and the Bank of Japan. And that would be enough to slow -- if not reverse -- the tide now flowing in the direction of the euro.

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