Tag Archives: Economics: Currencies

Pick Your Numbers

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It seems that there is a renewed interest in detailed comparisons of the economic realities in Europe and the US. First Die Zeit (German), then The Economist, and now Crooked Timber’s John Quiggin has a very nice piece illustrating the statistical problems inherent in all international economic comparisons – there’s not one just reality, and the truth is, as so often, mainly in the eye of the beholder.

By the way, Germany’s destatis is about to implement major changes to its system of national accounting that address some of the issues mentioned in John’s essay. So rest assured that German productivity will rise soon…

Onwards And Upwards We Go

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It’s no secret that the euro is now hitting record highs in its exchange rate with the dollar. It is also pretty apparent that some EU leaders are becoming rather preoccupied about the consequences of this for those eurozone economies which are driven by exports. What is much less clear though is what can be done about it.

The dollar early today was trading at $1.3065 per euro in Tokyo, signalling that the $1.30 psychological threshold may now lie behind us. Some experts are suggesting that the ECB would be reluctant to see the euro rise above $1.35, but since what is happening is more a dollar slide story than a euro rise one it is hard to see what they can effectively do about the situation.
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Euro-zone: A Default-free Area?

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This is the interesting question that Morgan Stanley’s Vicenzo Guzzo asked a couple of weeks back. The key background details in question are what are known as the cross-country risk spreads. Now this may seem like a piece of technical obfuscation, so what exactly does he mean?

Well, one of the main consequences of the introduction of the euro has been the dramatic reduction in what are known as the ‘interest rate spreads’ on sovereign debt.
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Hardly Breaking News

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That the US jobs report last Friday showed continuing weakness in the labour market is certainly by now far from breaking news. I wouldn’t however want to let it pass by without comment. I think it is now abundantly clear that there is a pattern in all this somewhere (what that pattern is precisely, and what is causing it may be another matter). The US is not creating the quantity of new employment it needs. This means that the output gap (the gap between potential and actual output) is unlikely to reduce, and that the Fed will in all probability be unable to raise interest rates as vigourously as it had anticipated. This is also likely produce downward pressure on the dollar (with a consequent upward pressure on the Euro) and all sorts of other weird and wonderful things which should preoccupy those given to thinking about these matters. I think the debate is effectively over though: this is more than just a ‘soft spot’.
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‘Volatilty’ is Back

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After a series of posts on the rise of the euro earlier in the year, I’ve been relatively quiet on this front of late. This doesn’t mean that the problem has gone away. The growing feeling that the US economy was taking off certainly eased the pressure, and the euro has hovered around the low 1.20s. Now it seems that with growing awareness that growth may be slowing large scale ‘currency trading’ is coming back on the agenda.

Trading on the world’s foreign exchange markets has leapt to a record $1,900bn a day, driven by renewed interest in currencies as an asset class and the return of hedge funds specialising in currency bets.

Turnover in currency and interest rate derivatives sold by banks also soared to new record levels, according to a three-yearly survey by the Bank for International Settlements……

After slumping amid the introduction of the euro, which eliminated the currencies of some of the world’s biggest economies, trade in foreign exchange bounced back between 2001 and 2004.
Source: Financial Times

There is once more a lot of talk around about the need to float the Chinese renmimbi (which is a move which should come in gradually, but which won’t have sufficient impact to resolve the problem IMHO).

Trying to see into the future is a pretty fruitless endeavour, but we should all be aware that any sustained weakening in the yen and the US dollar would almost kneejerk style bring the issue of a rising euro straight back on the agenda. Definitely one to watch.

It’s Deficit Time Again

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There’s a fair amount of talk again this week about the various government deficits and what to do with them. Earlier in the week the FT had a piece about the current state of play with the US deficit whilst the Economist is busy musing one more time over the ongoing saga of the EU growth and stability pact.

These two situations appear, on the surface, to be somewhat similar, but in reality it may be more interesting to consider how they differ.
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Rodrigo Rato: Wagging The Finger, Or Wagging The Dog?

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I have already posted on my own blog about what I see as the surreal consequences which might follow from this wish becoming a reality. If what I think happens next to the Spanish economy really does happen – and I have no doubt whatsoever that the housing bubble will crash one or other of these days – then the situation will be a bit like having Menem at the head of an IMFwhich is telling Argentina that they should have thought about the consequences before getting into all that trouble……..

My interest here today, however, is more the European dimension of this process. Firstly, if it is true, as the FT seems to contend, that the European candidature will carry the field, what does this tell us about the IMF? Secondly, maybe focussing on the IMF managing directorship is to miss the point. Maybe the real horse-trading is over future control at the ECB. In other words: will this be a case of wagging the finger, or wagging the dog?
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What’s It All About Alfie?

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Well I suppose it’s better to end the week on a bang rather than a whimper, so here I go with another of those posts. What really ended the week on a high note (or should I say a low one) was the US labour market. And since I am arguing that the euro-dollar parity is being driven at the moment by US labour market data, this news can only mean one thing: more upward pressure on the euro. Which makes me only want to re-iterate, and even more strongly, that an important opportunity was wasted yesterday to take some remedial action by lowering the interest rate. Remedial action which would also have supplied a much needed lifeline to Germany’s beleagured economy. But this, like so many things, was not to be.
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ECB: German Plea Falls On Deaf Ears

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When this is all over, and we come to look back at the when and the where, maybe we will remember today’s decision as just one more of those missed opportunities. Certainly not much notice seems to have been taken of Gerard Schroeders request for a helping hand on the interest rate front. Is there any significance in the fact that on the day the ECB decided to stand firm, German unemployment turned upward again to 10.3%, while it was also revealed that German factory orders fell unexpectedly by 2% in January: just for good measure I suppose.
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Europe’s ‘Sad Day’?

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“A sad day for trade relations between the US and Europe”. This is how John Disharoon, vice president of the trade committee at the American chamber of commerce to the EU described the decision by the European Union to begin imposing trade sanctions on US goods as of today. Of course, the arguments about why this measure is totally justified (or conversly totally un-justified) will be legion. However, at the end of the day, I can’t help agreeing with the above-mentioned comment. With all the problems we face out there in front of us, with all the dangers of a renascent protectionism which we can clearly see inside the US itself, this, it seems to me, is the last thing we need right now. It wreaks of the worst kind of logic of bureaucratic decision making.
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