Every month there seems to be a sharp decline in a different currency somewhere in the world, and the unlucky winner for July is the euro. The eurozone currency, shared by Germany, France, Italy and 16 others, is flirting with the US dollar for the first time since 2002.
This is a dramatic change since the beginning of the year, when one euro was bought for around $1.14. The parity indicates 12% depreciation. This may not seem like a big deal unless you are a currency trader. But sharp fluctuations in exchange rates create uncertainty and can lead to economic and financial instability.
Several factors are contributing to the fall in the euro. Europe has been hit as badly as the US after the pandemic and its inflation. Europe could worsen as its economies tended to grow more slowly than before the arrival of Covid, and tighter regulations and higher taxes make Europe less resilient.
Vladimir PutinThe invasion of Ukraine has created geopolitical uncertainty and is driving up energy prices. Monday’s closure of the Nord Stream 1 natural-gas pipeline in Germany, apparently for maintenance, contributed to the latest pressure on the euro.
But the most important reason is monetary policy. Facing the highest inflation in 40 years, the US Federal Reserve is normalizing policy, albeit late and slowly. Chairman Jerome Powell raised the target short-term rate by 1.5 percentage points to a range of 1.5%-1.75%, with a further 0.75-point increase expected this month. In March the Fed finally stopped new asset purchases and began allowing assets to run off its balance sheet as they mature.
The European Central Bank is even less aggressive in fighting inflation. It stopped buying net assets just last month and said it would not start shrinking its balance sheet until 2024. The short-term policy rate is minus 0.5% with this month’s quarter-point increase. Officials indicate that a second hike in September may–maybe– will provide a zero nominal rate. The widening gap in yields between the US and the Eurozone explains much of the exchange rate fluctuations.
Rather than fighting inflation, the ECB is focused on extending monetary easing for at least some eurozone members for as long as possible. Officials are busy trying to devise a mechanism to prevent “fragmentation”, by which they mean the difference between government bond yields of some countries and those of German bonds. The practical implications, if the plan works, would be a continued suppression of rates, particularly for Italy.
The risk is that Italy’s poor financial situation could become the least of anyone’s problem if the lack of coordination between major central banks continues. The dollar-euro exchange rate is one of the most important in the world, as observed by the late Nobel economist Robert Mundell. When rates begin to change, companies must spend more and more money hedging against exchange risks, preventing job-generating investments, and risking currency mismatches when they borrow. Huh. It all depends on financial stability and the Main Street economy.
Note how the conventional wisdom that a weaker euro fuels European exports is already proving false. The weakness of the euro earlier this year boosted corporate profits in export-strength Germany, mainly allowing companies to book higher euro-denominated income on products made and sold abroad. But the good times seem to be coming to an end as Germany posted its first monthly trade deficit since 1991. Energy imports are the main explanation. Energy markets set prices mostly in dollars, so a weaker euro is raising euro-denominated costs for German manufacturers.
,
The company of Europeans in currency depreciation. The Japanese yen has fallen this year, breaking the Tokyo red line of 125 yen to reach the dollar and is now hovering near 137. After thinking a weak yen could help the economy,
Chief Haruhiko Kuroda and other officials are trying to stabilize the yen. They are getting mixed success.
Dye can be added. The monetary authorities have decided that as they struggle to get out of their unprecedented policies of the past 15 years, they will do it their own way. But this year’s exchange gyrations are a reminder that there is a price to this seeming freedom—and that price is often paid in depreciating currencies.
Wonder land: Like other world leaders who bowed out in lockdown, Joe Biden and the Democratic Party are now realizing just how complicated the private economy really is, and how easy it is to ruin it. Images: AP/Shutterstock/Bloomberg/Zuma Press Composite: Mark Kelly
opinion | Incredible Falling Euro Near Dollar Parity
photo:
Wolfgang Ratte/Reuters
Every month there seems to be a sharp decline in a different currency somewhere in the world, and the unlucky winner for July is the euro. The eurozone currency, shared by Germany, France, Italy and 16 others, is flirting with the US dollar for the first time since 2002.
This is a dramatic change since the beginning of the year, when one euro was bought for around $1.14. The parity indicates 12% depreciation. This may not seem like a big deal unless you are a currency trader. But sharp fluctuations in exchange rates create uncertainty and can lead to economic and financial instability.
Several factors are contributing to the fall in the euro. Europe has been hit as badly as the US after the pandemic and its inflation. Europe could worsen as its economies tended to grow more slowly than before the arrival of Covid, and tighter regulations and higher taxes make Europe less resilient.
Vladimir PutinThe invasion of Ukraine has created geopolitical uncertainty and is driving up energy prices. Monday’s closure of the Nord Stream 1 natural-gas pipeline in Germany, apparently for maintenance, contributed to the latest pressure on the euro.
But the most important reason is monetary policy. Facing the highest inflation in 40 years, the US Federal Reserve is normalizing policy, albeit late and slowly. Chairman Jerome Powell raised the target short-term rate by 1.5 percentage points to a range of 1.5%-1.75%, with a further 0.75-point increase expected this month. In March the Fed finally stopped new asset purchases and began allowing assets to run off its balance sheet as they mature.
The European Central Bank is even less aggressive in fighting inflation. It stopped buying net assets just last month and said it would not start shrinking its balance sheet until 2024. The short-term policy rate is minus 0.5% with this month’s quarter-point increase. Officials indicate that a second hike in September may–maybe– will provide a zero nominal rate. The widening gap in yields between the US and the Eurozone explains much of the exchange rate fluctuations.
Rather than fighting inflation, the ECB is focused on extending monetary easing for at least some eurozone members for as long as possible. Officials are busy trying to devise a mechanism to prevent “fragmentation”, by which they mean the difference between government bond yields of some countries and those of German bonds. The practical implications, if the plan works, would be a continued suppression of rates, particularly for Italy.
The risk is that Italy’s poor financial situation could become the least of anyone’s problem if the lack of coordination between major central banks continues. The dollar-euro exchange rate is one of the most important in the world, as observed by the late Nobel economist Robert Mundell. When rates begin to change, companies must spend more and more money hedging against exchange risks, preventing job-generating investments, and risking currency mismatches when they borrow. Huh. It all depends on financial stability and the Main Street economy.
Note how the conventional wisdom that a weaker euro fuels European exports is already proving false. The weakness of the euro earlier this year boosted corporate profits in export-strength Germany, mainly allowing companies to book higher euro-denominated income on products made and sold abroad. But the good times seem to be coming to an end as Germany posted its first monthly trade deficit since 1991. Energy imports are the main explanation. Energy markets set prices mostly in dollars, so a weaker euro is raising euro-denominated costs for German manufacturers.
,
The company of Europeans in currency depreciation. The Japanese yen has fallen this year, breaking the Tokyo red line of 125 yen to reach the dollar and is now hovering near 137. After thinking a weak yen could help the economy,
bank of japan
Chief Haruhiko Kuroda and other officials are trying to stabilize the yen. They are getting mixed success.
Dye can be added. The monetary authorities have decided that as they struggle to get out of their unprecedented policies of the past 15 years, they will do it their own way. But this year’s exchange gyrations are a reminder that there is a price to this seeming freedom—and that price is often paid in depreciating currencies.
Wonder land: Like other world leaders who bowed out in lockdown, Joe Biden and the Democratic Party are now realizing just how complicated the private economy really is, and how easy it is to ruin it. Images: AP/Shutterstock/Bloomberg/Zuma Press Composite: Mark Kelly
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