ECB: Just Look At This!

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I had promised a quiet day. I may have to eat my words. Look at this on the euro, and remember my post yesterday.

The currency also weakened after Germany’s Stern magazine reported German Finance Minister Hans Eichel and Bundesbank President Axel Weber discussed a possible failure of European monetary union. The euro is off to its worst start of a year since 2001, down 9.3 percent compared with the dollar.

“This is extremely bad timing and has undoubtedly compounded euro selling,” said Monica Fan, head of global foreign-exchange research at RBC Capital Markets Ltd. in London.

The euro retreated from as high as $1.2341 after the magazine said Eichel and Weber, who represents Germany on the ECB’s policy committee, discussed the euro’s potential failure with economists. The magazine quoted Joachim Fels, chief fixed- income economist at Morgan Stanley, who took part in the meeting. Fels declined to comment.

“We can neither confirm nor deny” that a meeting took place, said Bundesbank spokesman Wolf-Ruediger Bengs in a telephone interview. “We hope to issue a statement shortly.”

This is incredible stuff, and that it is breaking in the press must also be indicative of something. I go back to my post last week. It seems what I suggested is right: the ECB is deeply divided, and this ‘quietism’ and the policy of twirp is causing alarm in two important economies (Germany and Italy). This is not the end of the euro, but this discussion could mark the begining of the end. It all depends on how rapidly events unfold, and how long ‘ostrichism’ prevails in Frankfurt and Brussels.

Postscript: I am following the evolution of the Euro/USD over at our other page: A Few Euros More.

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".

9 thoughts on “ECB: Just Look At This!”

  1. The euro is off to its worst start of a year since 2001, down 9.3 percent compared with the dollar.

    Edward, the way you summarized Bloomberg is misleading. What you wrote reads as if the Euro dropped by 9.3 percent in a single day.

    The original says:
    The euro is down 9.3 percent compared with the dollar this year

  2. Sorry if this was confusing. Thanks for clarifying, obviously this was how I read the “worst start of a year” bit. But at this stage this isn’t the issue, we aren’t expecting a 10% slide now, the issue is the ECB and whether a one size fits all policy can maintain credibility.

  3. Just to clarify as the story becomes clearer. The Washington post has this:

    “The euro dropped to $1.2255 in European trading, also propelled downward by an unsourced report in the German weekly Stern that a possible failure of the monetary union was discussed at a meeting last week attended by Germany’s finance minister and central bank chief.

    Both the Bundesbank and the Finance Ministry described the idea as “absurd.” The central bank said its president, Axel Weber, “rules out a failure of monetary union.”

    Obviously its in the end it probably isn’t too important what this meeting was, it is the perception of what is happening that matters as much as what is happening.

    It could be – eg – that the two of them went to a meeting addressed by Joaquim Fels, this would not be unreasonable, they have a responsibility to check out all the arguments, but the point is Central Bankers have to be very careful about what they are seen to be doing. Any equivocation at the ECB tomorrow will really make matters worse.

  4. worst start of a year since 2001

    Is this 9.3% indeed steeper than the original drop in 2001 after the currency union ?

  5. “Is this 9.3% indeed”

    No, that’s why it is ‘since 2001’. Of course we still have to see where this one goes, but as everyone will point out we are way above the 2001 values, and dropping back gently is no problem. The important questions are the pace of the drop, and the reasons for it.

  6. The important questions are the pace of the drop, and the reasons for it.

    I wholeheartedly agree.

    BTW, earlier this year, I think in March, BMW was criticized to make their forecast about profits based on an Euro/ value around 1.25$. This appeared too low. Seems like it wasn’t.

  8. And the reference value that the European Monetary Institute used at the introduction was, I think, $1.18 or $1.19. So we’re headed back to something like ‘fair value’ (though presumably we should check our Big Mac Index to see if PPP is holding) after an early dollar boom followed by a significant swing and a bit of a dollar bust.

  9. Here is the original data:

    “The euro climbed as high as $1.1804 on its first day of trading on Jan. 1, 1999, and fell to a record of 82.30 U.S. cents on Oct. 26, 2000. The dollar then dropped for three years through 2004 amid a combination of record U.S. trade and fiscal deficits and the lowest Federal Reserve interest rate target in four decades.”

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