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How Far Will The Euro Fall?
Authored by Anatole Kaletsky via Project Syndicate,
The US dollar is hitting new 12-year highs almost daily, while the euro seems to be plunging inexorably to below dollar parity. Currency movements are often described as the most unpredictable of all financial variables; but recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation – one that almost all economists and policymakers accept and endorse.
French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar," he told an audience of industrialists. But it is when things seem “nice and clear" that investors should question conventional wisdom. A strong dollar and a weak euro is certainly the most popular bet of 2015. So is there a chance that the exchange-rate trend may already be overshooting?
In one sense, the conventional explanation of the recent euro-dollar movement is surely right. The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing. But how much of this divergence is already priced in? The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far.
Last year, many investors questioned the ECB's ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed's willingness to tighten monetary policy, because doing so could choke off the US economic recovery. That is why the euro was still worth almost $1.40 a year ago – and why I and others expected the euro to fall a long way against the dollar.
But the scope for dollar-bullish or euro-bearish surprises is much narrower today. Does anyone still believe that the US economy is on the brink of recession? Or that the Bundesbank has the power to overrule ECB President Mario Draghi's policy decisions?
With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead.
On the side of a stronger dollar and weaker euro, there seem to be three possibilities.
One is that the Fed could raise interest rates substantially faster than expected.
Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher US rates.
Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB's bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding US Treasury securities.
These are all plausible scenarios. But at least four factors could push the dollar-euro exchange rate the other way.
First, there is the effect of the strong dollar itself on the US economy and its monetary policy. If the dollar continues to rise, US economic activity and inflation will weaken. In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish.
Second, there must be serious doubts about whether Asian and Middle Eastern governments will in fact want to shift more reserves into dollars, especially if this means converting the euros they have acquired since 2003 at a loss and far below their purchasing power parity. Many countries have spent decades diversifying their wealth away from dollars, for both financial and geopolitical reasons. With the US increasingly prone to using its currency as an instrument of diplomacy, even of warfare – a process known in Washington as “weaponizing the dollar" – China, Russia, and Saudi Arabia, for example, may well be reluctant to shift even more of their wealth into US Treasury bonds.
A third factor suggesting that the euro's downward trend against the dollar may not last much longer is the trade imbalance between the US and Europe. The gap is already wide – the International Monetary Fund forecasts a $484 billion deficit this year for the US, versus a $262 billion surplus for the eurozone – and is almost certain to widen much further, owing to the euro's 20% depreciation since the IMF released its estimate last autumn. The implication is that hundreds of billions of dollars of capital will have to flow annually to the US from Europe just to maintain the present euro-dollar exchange rate. And as the transatlantic trade imbalance widens further, ever larger capital flows will be needed to keep pushing the euro down. Such huge capital flows are entirely possible, but what will drive them?
That question leads to the final and most important reason for expecting the euro's decline to reverse or at least stabilize. While higher US interest rates will attract some investors, others will move away from the dollar if the combination of a more competitive euro, the ECB's enormous monetary stimulus, and an easing of fiscal pressures in France, Italy, and Spain generates a genuine economic recovery in Europe. The resulting flows of global capital into European shares, property, and direct investment – all of which are now substantially cheaper than corresponding US assets – could easily outweigh the cash and bond investments attracted by rising US interest rates.
hat, then, can strike a balance between the opposing forces operating on the euro-dollar exchange rate? No one can say for sure, but one thing is certain: Whereas the profits from playing transatlantic interest-rate differentials may run to 1% or 2% per year, investors can easily lose that amount in a single day – or even an hour – by buying the wrong currency when the trend turns. As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake.
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only as far as yellen raises rates, so, not far. Not far at all.
ALL THE WAY!
D'oh!
Which is a lot worse than how far can a dog get lost in the woods...
Well Draghi &Co. will have to determine the worst thing they can do and then go whole hog......
The Euro was built in part on Greece's financials being fraudulently structured with the help of Goldman Sachs.
If the Euro fails now it is not 'Graccident' but collapse of a criminally fraudulent entity.
Is this asshat author trying to tell me that market forces are at work here? Markets move FX? Free markets?
Protest fires in Frankfurt: http://www.theguardian.com/world/gallery/2015/mar/18/blockupy-anti-ecb-protest-in-frankfurt-in-pictures
Without Russia, the Euro got another 100% to fall.
Strong dollar? Strong against what is the question. Twelve years ago it only took just over 300 of them little dollar bills to buy one ounce of gold. Today? Whether you think the price of gold is manipulated or not, it still takes over 1,100 of them pesky little dollars to get that same ounce.
If a bunch of skydivers jump out of a plane with defective parachutes, ALL of them are in deep trouble.
Just because you jumped from a higher altitude - and will be the last to hit the ground - doesn't mean you're not in trouble.
In fact you're going to hit at a higher velocity and make a bigger SPLAT!
Agreed. Yellen isn't stoopid enuf to risk accelerating the euro collapse and whiplash effect of a decade of economic despondency. US rates have defacto risen by the fact that the other, dirtier shirts have legged down into negative i-rate territory. The whole charade crossed 'total madness' a long while ago.
At what point will we stop calling a shit soaked rag a shirt?
Better ask the expert - where's Jim Lahey?
Gold vs the euro charts?
Ok, 1 Euro equals 1 Dollar equals one piece of paper. So what is the paper worth? I guess it depends on how hard you need to take a shit.
It is valued versus gold. Everything is. Draghi has worsened the euro's buying power vs gold, the world's chief asset.
No, even gold has no value unless people have confidence in it.........remember you can't eat, drink or live in it so it's all relative.
Look for a pop in the Euro due to too many shorts on board right now, then it will likely continue it's descent into oblivion.
EUO or not EUO?
At least with Yellen Ultraplush you Have something to wipe your ass with
. As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake.
then it's guaranteed to happen. the costs are pocketed as profits by the people organizing this charade.
25 cents if there's a GERXIT
a buck fitty if there's a full on GREXIT
"I've fallen and I can't get up"
https://vimeo.com/109169719
You're still in my top ten list of ZH avatars.
A world currency sure would solve this conundrum. Just think of the Utopia we could achieve with a one world government. If only those damn Russian would play along..... fuckers.
They're just waiting for Putin to leave the stage.
Actually we already have a world currency Doc. So that's not the answer. What we need is something to compare all the currencies to. BTW- The Euro is going down the toilet and rightfully so as it's always been a globalist idea.
That's awesome, it would be like the Euro only better!
impossible!
How in the world would all these countries switch back from Euros to national currencies. All Europeans have now are Euros. Would each country set a rate of exchange from Euro to the newly resurrected currencies? They can't just call the Euro null and void. Then think of all the financial instruments denominated in Euros. This would be a category 5 financial hurricane.
???
The people that designed the Euro made it impossible to 'go back' - on purpose.
The problem is that they also designed a system that turned out to be a clusterf**k when all the participants weren't on an equal financial footing...... seems like they never considered that governments might LIE about such things (and have Goldman Sachs helping them cook the books)......... Who'd have thought?
If $1 = 1EUR.....then surely 1 USD ounce of Gold should be the same as 1 EUR ounce of Gold. .....Gold needs to go up from Here
Good observation, it's going up faster in Euros than Dollars even when they reach 1 to 1 parity. You know why, cause smart people in Europe are getting the fuck off the sinking ship.
Where's the (attempted) answer to the headline question???
"Does anyone still believe that the US economy is on the brink of recession?"
If there was a "recovery" (and endlessly repeating there was don't make it true) it was purchased at huge expence with TARP, The Stimulas, and the various itinerations of QE.
Sadly, none of those efforts increased the production of goods of value.
'on the brink of recession' !?!?!?
BWAHAAAAAAAAAAA......... that's would be an optimistic analysis even when using the fudged numbers gov issues......
The reality is we've been in a recession since '07. Just 'cause gov says we're not doesn't make it true. Just like unemployument is 5.5% using current methodology (and over 23% calculating it the way they did 30 years ago - WORSE than it was in 1932..... was the U.S. 'on the brink' of a recession then too?)
It doesn't matter because the psychopaths know the people don't matter and business will continue
Swiss Krono Group Begins Woodwork Mill Construction in Perm Krai Russia
ExxonMobil Boosts Drilling Rights in Russia Giving It More Holdings There Than in U.S.
Finland’s Fortum Sells Power Grid To Make Way For Russian Power Source
Poland’s APS Energia Launches Assembly Plant in Russia
U.S. Companies Like Baker Hughes Still Work On Russian Oil Projects
COUNTRIES WITH FANTASY CURRENCIES MEET TO DISCUSS COMMON FANTASY CURRENCYVenezuela, Ukraine and Europe agree to replace their monies with a common currency of higher imaginary value.
Source: www.financialpaparazzi.com
The USD is blatantly manipulated. Enough of the USD versus Euro, USD versus Ruble, USD versys Yen etc. What about Euro versus Ruble, Ruble versus Yen etc. My guess is they are staying pretty much on par with each other.
All they have to do is purchase more US Treasuries and more US Currency. Problem solved. Tie EU to the USA.
That is it. Japan and South Korea have been doing for Decades.
And if you see the TIC Data, you know they are already engaged in doing it, Europe is buying US LT Treasuries.
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- GOOGLE FUNDS CODE2040...
- 'Year population of minorities expected to overtake whites'...
Was just noticing this today of exactly how much the Euro has fallen relative to the Dollar. I knew it had fallen obviously but did not realize it was basically at parity with the USD now. Naturally, it began it's precipitous drop right after I left Europe where I had been living last year for some time. Impeccable timing in reverse.
How far? That's easy. To zero.
The current drop is the smart money cashing out and moving their ill-gotten gains to New York before Putin finally lets the Fourth Reich have it. The only way to hedge against a war between the EU and Russia---and a Russian victory---is to hold no EUGBs or equities in firms with more than a trivial exposure to the EU. Simple as that.