Another Record High For The Euro

The euro today again broke through to a new high at $1.3329. This was on the back of an unexpected decline in US consumer confidence. What seems to be happening is that any piece of good news in the US temporarily stems the rise, whilst bad news sets it off again. And this despite the fact that the the European Commission itself released some pretty depressing business confidence numbers for the eurozone.

Meanwhile ECB president Jean Claude Trichet meticulously failed to mention the possibility of central bank intervention in closely watched comments to the European Parliament’s economic and monetary committee, restricting himself to repeating that currency movements like the ones we are seeing now are ‘not welcome’. So we seem set to continue on towards the $1.35 level. What happens then we’ll see if and when we get there. As they say somewhere: “this ain’t done till it’s done”.

This entry was posted in A Fistful Of Euros, Economics: Currencies and tagged by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

26 thoughts on “Another Record High For The Euro

  1. $1.45 would put us about at the post-war dollar low that was observed against the D-Mark. Then things get really interesting.

  2. It’s “it ain’t over til it’s over”. Baseball star Yogi Berra. Also gave us the gem “it’s deja vu all over again”.

  3. For comparisons sake; anybody know what the post-war lows for the British Pound, the French Franc, the Italian Lira, etc. were ?

    I dunno, as long as we’re clear that the problem is that the USD is weakening and not that the Euro is strengthening without cause, the impact on Europe will be much smaller compared to the economic hit the U.S. takes.

  4. I’ve read analysis of this that suggests if the dollar falls against the euro, it’ll be bad for the Eurozone economies, because Americans will buy less of their goods, therefore there will be less overall demand for their goods, and they’ll have to cut back production.

    But I’m not sure that’s right. My argument follows — bear in mind I’m not an economist and I’d be grateful if anyone could point out any flaws in it.

    If the dollar falls against the euro, Eurozone economies will have to pay less euros to get the same number of dollars, and therefore will be able to pay less to import the same amount of goods from the USA. Because they are paying less, they will have more money left over, which they can spend domestically, which will tend to cancel out any reduction in demand from the USA.

  5. Also the eurozone must buy dollars to purchase oil on the international market, so if those dollars get cheaper it is a huge benefit.

  6. The can import the same amount of chinese goods. Nobody is interested in what you can buy from the US.

    On a somewhat more serious note. The big problem that America will have is that latge parts of their exports are *star* based. And they go were they can make(spend) the most money and that could be the EU if the dollar keeps declining.

  7. It’s obvious he was pretty upset at the election results, but can anyone say the likelihood that George Soros is meddling again as he did against the British Pound and other currencies?

    Just something for speculation…

  8. P(G), don’t know the other currency lows because in market terms they really didn’t matter much. Once Miterrand established the “franc fort” policy in 1983, monetary policy effectively move to Frankfurt, where it has been ever since. The difference now is that with the ECB, France and the other eurozone countries have a seat at the table.

    What would be interesting to know is to what extent the dollar and pound have de-coupled in currency markets. The Canadian dollar has also been rising significantly against the greenback, and the pound may be as well.

    Eric A., there’s three reasons why a Soros-style coup is not in the cards just now. First, the US is not trying to hold the dollar within a specified trading band, as the UK was trying to do with the pound and ERM. Second, there’s not as clear a policy contradiction going on. Third, just now the dollar is a one-way bet for the currency markets. It’s not a question of direction, just how far and how fast for how long.

  9. I forgot exactly who, but IIRC a deputy head of the German Industrial Chamber(?) had a few interesting words on the matter. He doesn’t think the Euro rise is that tragic for exporters, they can weather it if the climb is not too fast. This is certainly supported by the fact that many European exports are quality exports, whose buyers won’t switch to another product just because it became cheaper. It might also explain the behavior of the ECB and other European economic policymakers: sound concerns to keep speculation in check, but not shell out money for interventions – they might want to avoid Japan’s fate. (At least I hope so.)

    On the other hand, to end the current global economic imbalance (a US trade deficit resulting from credit-based consumption [and bad private-sector strategies] is maintained with an ever increasing inflow of foreign capital), a big dollar fall now might be the least bad solution (the later it happens, the worse its effects) – and similarly to what Phil Hunt suggests, if in this situation those countries whose exports suffer redirect the money paid in this imperial tax to push local consumption, they could weather the aftermath with relatively minor difficulties.

    (BTW, economic reporting is sometimes just abysmal. When reports and TV commentators connect a recent Euro rise with a recently reported export slowdown, even tough the latter refers to an earlier month, I just shake my head.)

  10. I read the suggestion that the current Euro rise is driven by some Central Banks that change their reserves covertly (I mean without a big announcement).

  11. Doug, check BBC News’s figures, for example – while moving relative to each other, the big picture (major peaks, rises, falls) vs. the dollar is similar for the Euro and the Pound, especially in the last month – while the Euro/Pound graph resembles the Euro/Dollar one only in late summer.

  12. Thanks, DoDo. And good to see that I can get the crosses without a Bloomberg. If we’re getting pound-euro convergence, that could be quite a big deal.

    The biggest German exporters, the car companies, are hedged against dollar movements in the most basic way possible: they build and sell cars in the US. So Germany AG may weather an orderly movement fairly well. Not so the Mittelstand. They’re not big enough to have North American operations, and may not be sophisticated enough to hedge their earning. So Germany GmbH could be in for rude surprises.

    We’re also nearing the point where market-driven movements begin to impinge on the fundamentals. And finally, the US Treasury has, historically (by which I mean since 1984 or so, to the best of my knowlegde), been much more knowledgeable on dollar-yen issues than on dollar-mark or dollar-euro issues.

  13. I am wondering what the chance is of faster rising inflation in the US. The US had a trade deficit, where it imported more than it exported, if the dollar falls, less can be bought with the dollar. Will there be less spending on foreign imports or will the same amount of products be bought at a higher cost, which then might be passed on to the consumer resulting in higher prices?

    “If the dollar falls against the euro, Eurozone economies will have to pay less euros to get the same number of dollars, and therefore will be able to pay less to import the same amount of goods from the USA. Because they are paying less, they will have more money left over, which they can spend domestically”

    This theory has one little flaw. Many savings on imports are not always passed on to the customer. I.e – the savings on Brazilian fruit for instance (which are paid for in Dollar) are not necessarily passed on to the customer in cheaper prices. If it was, maybe consumer confidence and domestic demand would rise.
    However, there are two things we can see that are good – importing raw materials for production becomes cheaper (oil is just one). And travelling to the US is cheaper too. I’ve seen reports about increased demand for weekend trips to the US for Christmas shopping.

  14. Well it really is interesting to hear the thoughts of all you happy optimists. It’s like a walk in wonderland. The only ones really concerned about the rising Euro seems to be Europe’s own economists, including our friend Edward, who seems to understand the real significance.

    It’s all about growth, economic growth. If you don’t have it (and Europe doesn’t to a real degree) then everything else becomes threatened. The low dollar has only worked against that necessary growth for the EU, while giving an added boost to growth for the US.

  15. “If we’re getting pound-euro convergence, that could be quite a big deal.”

    Well, so far we only have correlation – I wouldn’t call relative changes insignificant.

  16. Doug: “Not so the Mittelstand. They’re not big enough to have North American operations, and may not be sophisticated enough to hedge their earning.”

    Nothwidthstanding my argument that went beyond hedging – it would be bad, but just how serious would be a 10% drop in exports? Because even if all exports to the USA would stop, it would be less – the structure of German exports changed significantly since the current dogmae formed (a dogma being that the USA is the main export market and hence the one to watch).

    Melli, I think there are multiple effects to consider – for example, the US industry needs to import large amounts raw materials, even more so if it can manage to sell more after a dollar slump, so that would mean rising prices. On the other hand, anxious exporters can respond with price cuts – at least up to a point.

  17. The post-war low against Sterling is the fixed rate just after the war, which IIRC, was $4.86 to ?1.

    I don’t think it will reach that! Indeed I’d be surprised if the pound went and stayed above $2 for long.

  18. $4.86 to ?1 seems like too much of an outlier,
    I certainly don’t see it trending towards that.

    That said, A catastrophic failure in Iraq (e.g. Iran invades, U.S. forces too thinly spread and exhausted to beat them back out) or elsewhere (e.g. Korea, Taiwan) could change the picture quite dramatically, quite quickly.

  19. Well, the pound traded at over $2 for most of the period until the 1970s – Callaghan resigned as Chancellor in the 60s over a devaluation from $2.80 to $2.40, IIRC.

    But in terms of more recent history – especially in the post-Bretton Woods period – the pound went above $1.90 today. According to the BBC that’s the highest it’s been since 1992. I can’t find a list of historical dollar-sterling prices yet (the best I can get is this pdf chapter about the Norwegian Kroner and from the data in that, I think the pound reached similar highs in 1992 and 1988, but has been below $2 (even getting close to $1 in 1985) since 1981.

  20. A very interesting thread of comments.

    There seem to be two issues: whether a rising euro is good or bad, and whether there is a euro/pound sterling convergence.

    On the first one, obviously there are pluses and minuses. For consumers, or those who want to travel outside the eurozone, the rise is positive. It is also positive for raw material imports. OTOH all these imports have to be paid for. As RSN might point out, the high dollar era has left the US economy with a whopping accumulated external debt produced by the trade deficit, and a heavily indebted group of consumers.

    Now one of the features of the present eurozone economy is that domestic consumption is extraordinarily flat in some major national economies (Germany and Italy being the most outstanding examples). You can pick your choice of reasons as to why this is, my guess is that it is demographically related (with ageing, more evidence, Japan is in the same boat) and won’t be changing anytime soon.

    So this leaves these economies overly dependent on exports to achieve growth, and this is where the problem comes. As Dodo points out some exporting industries are able to absorb costs, but the euro has already risen significantly in the last 18 months, and there will be a limit to this capacity to absorb. My guess is we may be near to reaching that point.

    The worst case scenario here would be what happened in Argentina, where the rising dollar to which the peso was attached produced a substantial trade deficit, and internal deflation. This IMHO would be a major risk in the eurozone if this rise were to continue unchecked for an extended period of time.

  21. Now on the issue of pound sterling/euro convergence, I really doubt that this is likely.

    The pound is a very special case in international currency terms. Its value is highly sensitive to UK interest rates (currently 4.75%) and growth expectations for the UK economy.

    In part this is a legacy of Britain’s imperial past, a product of the openness of the financial markets of the city of London, and of the importance of financial and related services in the UK economy in general. Large quantities of money may enter or leave in any given moment.

    In this sense interest rate policy in the UK must in part reflect the need to attract overseas funds to balance the ongoing current account deficit, and this alone makes it different from the eurozone archetype.

    Secondly the UK housing market is extremely sensitive to interest rate changes, and in part changes in the value of the pound will reflect Bank of England interest rate policy to attempt to control fluctuations in this market which are considered to be especially important in UK macro policy.

    As a point of detail the pound did start to follow the dollar down recently, as pessimism about UK growth related to the housing question set in, and as it seeemed interest rates might start to come down in the new year. Now it seems there has been a ‘blip’ in November: housing prices have not fallen as quickly as expected, and growth momentum seems to have been sustained (at least temporarily) so the prospect of interest rate cuts has receded, and as such the value of the pound has started to drift up again.

    So, to sum up: the UK economy displays significantly different characteristics to most other eurozone economies. These characteristics mean that Bank of England policy decisions may often be considerably out of phase with ECB decisions, and that movements in the pound are unlikely to mirror movements in the euro over any extended period of time. These factors were undoubtedly considered to be of some importance in the recent decision of the UK government not to proceed in the immediate future with eurozone membership. I think this decision was a good one.

  22. Maybe one more point is in order. Some comments mention imbalances, and these are important. The global economy and the global finacial system are suffering the consequences of these imbalances.

    As I mentioned the value of the pound sterling is partly dependent on the growth outlook for the UK economy. It is not so easy to say the same about the value of the euro, since the euro is rising rapidly amidst a general growth slowdown in the area.

    The rise in the euro is a product of the dollar decline due to the structural situation of the euro as a substitute reserve currency. This situation is not desireable, and as I am suggesting may well have unfortunate consequences.

    The problem is that any resolution of this issue will not be easy as it likely requires structural changes in the international financial architecture. But this is a complex and technical question and I am not going to get into it here.

  23. Patrick i was joking about the $4.86! I think that rate held until the Attlee devaluation of 1949, when it was 2.8 until the 1967 devaluation. It went below 2 in 1976 and with a few spikes above it which Nick mentioned has stayed there ever since. IIRC it’s all-time low was 1.01 in 1985. You can get data back to 1801 here

    The interesting thing about the current dollar saga is that on the only successful long-term valuation theory of currencies, purchasing power parity theory, it’s way undervalued (I thnk 1.5 is the usual sterling/dollar rate quoted). That’s why shopping trips to New York are so popular (and of course misguided if you intend to stick to the law – most purchases over about ?150 attract VAT and duty when you return to Britain).

    If I was to make a guess I think the dollar might rise quite sharply at 1:31 US time tomorrow if there’s a strong US jobs number.

  24. The interesting thing about the current dollar saga is that on the only successful long-term valuation theory of currencies, purchasing power parity theory, it’s way undervalued

    Undervalued only if you’re not taking into account the risk premium required to offset the risk of a currency backed by the tax-raising abilities of a government solidly controlled by a rabidly anti-tax but lavishly spendthrift party.

  25. “If I was to make a guess I think the dollar might rise quite sharply at 1:31 US time tomorrow if there’s a strong US jobs number.”

    Well unfortunately Mathew there wasn’t, the numbers were pretty soft and the impact was to weaken the dollar slightly.

    But my point would be that any one piece of data isn’t going to do much to change things at present. For the dollar to really firm up you would need to see continuing and sustained progress on both of the deficits and on the jobs front, and we’re a long way from any of these just now.

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