Draghi's Dilemma - Why Is the Euro Still Gaining Against the Dollar?

Tyler Durden's picture

Authored by Daniel Lacalle via The Mises Institute,

The primary purposes of the incorrectly named “unconventional monetary policies” are to debase the currency, stoke inflation, and make exports more competitive. Printing money aims to solve structural imbalances by making currencies weaker.

In this race to zero in global currency wars, central banks today are “printing” more than $200 billion per month despite that the financial crisis passed a long time ago.

Currency wars are those that no one admits to waging, but everyone wants to fight in secret. The goal is to promote exports at the expense of trading partners.

Reality shows currency wars do not work, as imports become more expensive and other open economies become more competitive through technology. But central banks still like weak currencies —they help to avoid hard reform choices and create a transfer of wealth from savers to debtors.

The Euro Rallies

So how must the bureaucrats at the European Central Bank (ECB) feel when they see the euro rise against the U.S. dollar and all its main trading currencies by more than 12 percent in a year, despite all the talk about more easing? The ECB will keep buying 60 billion euro a month in bonds, maintain its zero interest-rate policy, and keep this “stimulus” as long as it takes, until inflation growth and GDP growth are stable.

Contrary to the wishes of the ECB, however, a strong euro is justified for several reasons.

The European Union’s trade surplus is at record highs, and, 75 percent of Eurozone trade happens between Eurozone countries. Higher exports and the continued recovery of internal demand in European member countries strengthen the euro.

 

The perception of weakness of the U.S. government and its inability to push through key reforms. This has weakened the dollar and by definition strengthened the other two large trading currencies, the euro and the Japanese yen.

 

And another important factor is the relief rally after the French and Dutch elections. The fears of a Euro breakup have been eliminated, or at least delayed, as pro-EU political parties won.

The Problems With a Strong Euro

However, a strong euro has very significant implications for the EU economy and the ECB’s policy.

The strong euro puts exports to its main outside trading partners - the United States (20.8 percent of exports in 2016) and China (9.7 percent) - at risk. Despite the ECB’s extreme monetary policy and a euro trading almost at parity with the dollar, exports to non-EU countries have stalled since 2013. GDP growth estimates for 2018 are falling due to a lower contribution of net exports.

The currency also has a high impact on tax revenues in Europe. The correlation between the euro–dollar exchange rate and the earnings estimates of the largest multinationals represented in the Stoxx Europe 600 Index is very high.

According to our estimates, a 10 percent rise of the euro against the dollar is equivalent to an 8 percent drop in earnings and leads to lower corporate tax revenues. From an investment perspective, as earnings drop, the European stock market goes from being relatively cheaper to becoming more expensive.

Investors and economists need to pay attention to these factors. If the euro continues to strengthen, the EU economic recovery is at risk. So the Eurozone is stuck between a rock and a hard place. It cannot stop the stimulus because deficit spending governments cannot live with higher financing costs, and increasing the stimulus to weaken the currency simply doesn’t work anymore.

The only way out is structural reforms, but most governments are afraid of them even in good times, let alone when the going gets tough.

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Five Star's picture

One thing is for sure, it's not because of the Eurozone economy. Seven of the 25 slowest growing countries in the world since 2000 are in the Eurozone.

http://thesoundingline.com/ranking-worlds-economic-growth-21st-century-g...

 

Cash2Riches's picture

Its shameful that they don't even try to hide the fact that they are openly in a currency war anymore. The elites have arguably already wrecked our system, and will continue to print fiat money to infinity and beyond. This is just one more bullish signal for the long term fundamentals of gold.

grasha87's picture

I have created a free market currency that helps alleviate unemployment and recessions that the Fed creates, and it's based on Say's law: https://bunky1787.wordpress.com/2017/09/06/the-wallark-neo-scrip/

YUNOSELL's picture

This week was Europe's turn -- next week could be USA or Japan's turn -- it just all depends on which member of the cabal needs to squeeze some shorts and show 'em whose boss

The Alarmist's picture

Total misreading of the market ... it's not that the Euro is appreciating versus the dollar. It's called a race to the bottom, and face it ... as in so many things, We're #1!

We're talking about Europeans here: They'd fu*k up a wet dream.

Raffie's picture
Draghi is just another criminal and thug.

Part of the Geroge Soros gang.

Hkan's picture

Draghi is deep state hang around.

Sweet dreams a vest of his own,,,,,

JohnGaltUk's picture

I hope he gets the Mussolini treatment.

NoDebt's picture

That was our plan all along.  MAGA!

 

gatorengineer's picture

I believe the answer is that the US is effectively printing 3T a year in State and Federal Debt.  This is equivalent to QE and increasing the money supply.  Whereas in Europe who prints the same action is effectively sterilized by the ECB buying it.

 

Ama I right do I win a stuffed pig?

mendigo's picture

Debt is sponge soaking up bens liquid.

virgilcaine's picture

UWell they wanted their own currency.  Surprised the last dose of Euro strength didn't kill them completely.  This round should do it.

gatorengineer's picture

why would it?  they actually buy their own goods,and export little (french wines and subsidized air planes)  while their rubber chinese dogshit and oil bill got alot cheaper....

NoDebt's picture

Yeah, but Gator, they buy a LOT of rubber dogshit.  As I'm sure we all do.

Also, Legos, which I think are their #3 export (kidding) just got a lot more expensive.

 

gatorengineer's picture

Having kids that are lego fanatics, they got the LEGO magazine with the $700 millenium falcon kit.  It would take them probably 5 hours to knock it out and they would be done.  Not happening at our house....  can you imagine the margin on those bricks

buzzsaw99's picture

I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part.  [/Otter]

CJgipper's picture

Draghi, you better get in the game!!!! You're falling way behind US and CHina in destroying your currency.  FIRE UP THOSE PRESSES!!!!!

Consuelo's picture

 

 

"In this race to zero in global currency wars, central banks today are “printing” more than $200 billion per month despite that the financial crisis passed a long time ago."

 

Did it now?   Who you gonna believe - me, or your lying eyes...?

grasha87's picture

I have created a free market currency that helps alleviate unemployment and recessions that the Fed creates, and it's based on Say's law: https://bunky1787.wordpress.com/2017/09/06/the-wallark-neo-scrip/

Making Merica Great Again's picture

Draghi looks like straight outta the Sopranos.

Honest Sam's picture

It isn't today.  It's dropped a whoie penny since 8:00 a.m., quickly.

I have to double check every thing you post.

 

mendigo's picture

The intellectuals managing our economy are very highly educated and talented wordsmiths.

At some point the cruel and unusual measures become neccesary once nation is intellectually morally and fiscally bankrupt. Monetization.

Sometimes a cigar is merely a cigar.

jin187's picture

It's pretty obvious why the Euro is still gaining in the dollar. True, they may be accruing massive debt, but we're still outpacing them in that department. They go cheap, we go cheaper.

venturen's picture

I think Draghi sucks on something other than a cigar....it might involve lloyd

Silver Willie's picture

Stronger Euro will allow these guys to aquire more petrodollars to lubricate their economy. There could be an additional "silver" lining as well.  

Vimes's picture

Is the euro strong or the dollar weak? The U.S. has everything to lose, Europe never actually had anything after WWII. 

Herdee's picture

So, when is the government going to start sending me cheques with lots of zeroes on them so that I get free money to buy gold?

Himself's picture

Unintended consequences of terrorist money laundering due to the U.S. Patriot Act?

https://www.youtube.com/watch?v=uXl-mKZ7aSc

alpha-protagonist's picture

Give Draghi a floppy hat and a mustache and voila! ...Inspector Clouseau

much obliged's picture

Quote: The only way out is structural reforms, but most governments are afraid of them even in good times, let alone when the going gets tough.

Just what effective structural reforms could take place, apart from ending central banking that would bring in a free market in interest rates? The current low growth trajectory has to continue, and go to and stay near zero for the sake of the environment while attaining a decent standard of living.