The ECB met earlier today to conduct the monthly review of interest rate policy. It came as a surprise to noone that the outcome was to leave everything just as it is. Surprisingly though the decision this month is surrounded by a little more controversy than has been the case of late since Italy’s Berlusconi and economic opinion in Germany have been suggesting that some reduction of rates might be no bad thing, whilst Spain’s economy minister (and former EU commisioner) Pedro Solbes is reported to have been pushing for an increase. Why the difference?
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Tag Archives: the euro
Scary Stuff
In a post which appeared earlier this week Tobias asks us whether, given some of the possible consequences of a French “non”, it might not be reasonable to ‘scare’ voters a little by spelling out some of the potential fallout which might follow a French rejection of the Constitution Treaty.
Perhaps the phrasing is unfortunate, but undoubtedly voters in Eurozone countries need to think long and hard about one especially sensitive area of impact: the future of the euro itself.
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Central Bank Blues
In a fairly ironic and cryptic post yesterday I alluded to the potential influence of the Russian central bank on the value of the euro. This situation is not to be taken lightly. The euro today hit another record passing the 1.32 to the dollar mark. At the same time business confidence index readings from Germany and Italy indicate that those who need to export are none too happy about the future.
A Russian move to raise euro reserve holdings from 30% to 40% of the total, mentioned as a possibility in an FT article yesterday, could have profound consequences:
Neil Mellor, currency strategist at Bank of New York, raised the prospect of a potential domino effect: ?Talk of central banks readjusting their reserves to encompass a greater euro weighting has been rife in the foreign exchange markets for quite some time, along with speculation that OPEC members may shift to euro-denominated oil sales.
?A dam can only take so much pressure. Russia?s stated intent to review its reserve weightings, in favour of the euro once again, could well lead to similar announcements by its counterparts across the world.?
Source: Financial Times
So the danger is that if Russia initiates others may follow. A fall in the dollar’s value of say 30% over 3 years would be one thing, but a rapid fall of this kind of magnitude precipitated by a shift in central bank holdings over a limited time horizon would be quite another. This is definitely one to watch.
Onwards And Upwards We Go
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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‘Volatilty’ is Back
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.
Of We Go Again, Ready, Set……….
After a weekend of semantic analysis the currency markets didn’t take long getting back to work – the euro was only a cent off its all time high by late morning. According to Dictionary.com the relevant meaning of volatility is: tending to vary often or widely, as in price – the ups and downs of volatile stocks. Not much danger of volatility here, not if the only way the dollar is going to go is down. Wouldn’t the more appropriate term have been secular decline? But maybe they aren’t against that, and the markets in turning the pressure back on the dollar, have read the signal exactly right.
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Parmalat Update
Well, well, what do you know: Paramalat’s real debt is much bigger than was first thought. What a surprise. According to the Financial Times Parmalat’s gross debt now stands between ?14.5bn and ?14.8bn ($18.08bn-$18.46bn). At the same time its main Italian operations barely made a gross operating profit last year. Meantime Italy’s unions are threatening a strike iif the government reduces the regulatory role of the central bank. The dispute has arisen as a result of the Parmalat scandal, which the government blames partly on a failure of oversight at the central bank. As a solution the finance ministry wants to reform financial market regulation in Italy so that the central bank would no longer supervise corporate bond issuance and competition in Italy’s banking sector. The unions object to this.
Actually this was meant to be a quick post, but while writing it I cannot help reaching the conclusion that Italy may be begining to fall apart. Just wait till you read this.
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Things That Can’t Go On Forever, Don’t
Ok, the sun is shining nicely down here in Barcelona right now, so maybe this is a good moment to come out and provoke a storm. The euro: something gives, but what? Actually it is perhaps ironic that I have chosen today of all days to write this, since for once it seems the euro may fall rather than rise: well to someone who is accustomed to marching out of step, this almost seems par for the course. Never mind, tomorrow, or the day after, we will be back to normal, and the seemingly unstoppable rise will continue. The only remaining question really is: where is breaking point, and what will happen when we get there?
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Fiscal Tickery
Thanks David for the link. I haven’t commented on this because like Dutch finance minister Zalm (who I imagine working away weblogging into the early hours under a dim light provided only by his mobile phone) I am tired. I can’t help feeling that everything that needs to be said has already been said, and many times over. Now all we can reasonably do is wait and see the consequences.
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Stability Pact
First of all, let me say I’m flattered to be invited to guest-blog on Fistful of Euros, which I’ve long thought was the coolest name of any blog ever.
I’d hazard a guess at two big reasons nobody has much to say about the security pact unraveling: First, there’s simply not that much to say at this moment beyond the bare facts of the case (although neither The Economist nor US bloggers Daniel Drezdner and Atrios have really captured the outrage that European editorialists have spewed at Paris and Berlin over this). The message from Germany and France is pretty clear: Do as we say, not as we do. End of story.
Second, this is a pretty difficult topic for a layperson (such as myself) to get his head around. Hence the usage of compact but vague phrases like “Europe Rips Up the Rulebook,” the headline given my recent press review on Slate covering this topic. (Feel free to read that if you want a review of the basic facts of the case from a non-economists’ perspective, plus a dose of what the European papers have said about the topic; but naturally I can’t compete with The Economist‘s coverage.)
So they tore up the rulebook. Seems a little back-to-basics is in order here: What was the rulebook for anyway? And what does this mean for the future of the euro?
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