How the ECB will force the Euro lower

It is not as if the euro zone is short on problems. The economy is struggling to grow even as the rest of the world hits what is likely to prove the peak of this cyclical recovery. Jobs are not being created, and youth unemployment is crippling. Half the continent is slipping into deflation, worsening its debt crisis.

euro currency ECB

And yet, on top of that, it has a fresh problem, and one that threatens to make its economic challenges even more insurmountable. A soaring currency.

The euro just keeps on rising in value. Back in 2012, when people were seriously worried they might wake up one morning and find the euro had fallen apart overnight, it went all the way down to 1.20 to the dollar. It looked as if it might dip below parity, as it did shortly after the single currency was launched. But ever since then, it has been climbing steadily, rising all the way back to 1.39.

That is way too high.

It is going to crucify Europe’s already hard-pressed exporters. It pushes down prices, increasing the risk of the continent tipping into full-scale deflation. And it throws away the opportunity to claw back competitiveness for the peripheral economies.

The European Central Bank is likely to launch a three-part campaign to get the currency back down again, including lots of talk, direct intervention, and finally printing money. Investors have been piling into European assets all through this year — but as the currency comes under inevitable pressure they will be facing big losses.

Ever since its launch, the euro has been a volatile currency. Just before the financial crash, it went above 1.55 to the dollar, and in 2011 it was up to 1.45. But it has also been down at the 1.20 level in 2005, 2010 and 2012. Hardly surprisingly, at the depths of the euro-zone crisis, with Greece, Portugal and Ireland going bust, and Italy and Spain looking likely to join them, investors were about as keen to hold the currency as they are on rubles right now.

The steadying of the euro ever since the ECB President Mario Draghi promised to do whatever it took to save the currency has bought it back into the club of acceptable assets and it has been rising ever since.

Why is the euro so strong on the currency markets?

There are three reasons. The first is that investors have been piling into euro-zone stocks and bonds as the region recovers — stronger demand means the price of the currency goes up.

Next, the Chinese have been steadily devaluing the yuan, and the Japanese have been trying to force their currency lower as well. When one currency falls another has to rise — and since the Europeans have been the only major economic bloc not trying to manage their currency lower it is hardly surprising it has been rising.

Finally, don’t forget deflation. If prices start falling across the euro zone, then holding the cash makes sense. It gets more valuable just by sitting in your bank account.

This Article Wrote For By Fxstay

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