Euro strength sparks export worries
Tuesday, March 24, 2009
EUR
The strength of the Euro is beginning to concern many within the European Union. Traditionally, higher currency valuation has a direct affect on the export trade as goods are more expensive to purchase. The rise in the value of the Euro at a time when the European export business is already in a severe state of slowdown will no doubt have a further negative impact on the industry.
The European Union, in contrast to the governments of The United States, Great Britain and Switzerland, has not announced an economic stimulus program that includes the purchase of government debt by the Central Bank or the injection of “new” money into the financial system. While this tactic is typically not common, many countries have employed it in an effort to free up money for business and consumer lending in a market that is essentially void of such at this time.
The fear is that if the EU does not act soon, the Euro could rise to $1.60 versus the Dollar and reach and even exceed parity with the Sterling – a move that would virtually lock out European exports from most major countries.
At Friday’s close, the Euro traded down .6% to the Dollar at 1.358 although for the week the Euro was up over 5% versus the greenback. The Euro traded down to the Pound to close at .9386, down 1/3rd to the Swiss Franc to 1.5294 and up nearly 1% to the Yen to 130.31.
USD
The US Dollar had a rebound on Friday; however it did have the largest weekly fall since 1985 against a basket of major currencies. The fall of the dollar was spurred on by a decision last Wednesday by the US Federal Reserve to purchase more than one trillion dollars worth of long-term US government debt – which is kind of like taking money from your left hand pocket and putting it into your right hand pocket. The money the fed used was “new” money – freshly printed for that matter – and that was seen as flooding the market.
Analysts are expecting the dollar sell off to continue as the US government nears three trillion dollars worth of new spending to help curb the recession. At a certain point the US runs the risk of devaluing their currency – which would have a trickle down affect on imports as well as the sale of government debt. Some analysts are predicting a collapse of the US’s standing as a safe haven currency because right now it is hard to see it sustained as such with record deficit and an overall astronomical national debt that would take at least fifteen years to pay down. The last such country to do something similar to the US was Zimbabwe – and we all know how that turned out.
The Dollar closed up 1 ½% to the Yen to 95.93, up ¼% to the GBP to 1.4459, up .1% to the Canadian Dollar to 1.2411 and down .35% to the Australian Dollar to .6872.
Chart EUR/USD – 30 Day
The Dollar seemed to be holding its own until the US government began unveiling their spending plans. The chart below shows a direct correlation between the various spending bills and their effect on the value of the Dollar against the Euro. To think this is coincidence, one only needs to look at the USD versus every major currency and a similar pattern will be revealed. IN the past 30 days, the Dollar has lost over 7% to the Euro – a staggering number. And many are predicting that this could just be the beginning if the US keeps spending AND if the EU does not implement a more aggressive approach to its handling of the recession. $1.3750 is the next resistance level and if it should hit that the next level up would be $1.3950. It is expected that the Euro to break through both levels in the near term.
The strength of the Euro is beginning to concern many within the European Union. Traditionally, higher currency valuation has a direct affect on the export trade as goods are more expensive to purchase. The rise in the value of the Euro at a time when the European export business is already in a severe state of slowdown will no doubt have a further negative impact on the industry.
The European Union, in contrast to the governments of The United States, Great Britain and Switzerland, has not announced an economic stimulus program that includes the purchase of government debt by the Central Bank or the injection of “new” money into the financial system. While this tactic is typically not common, many countries have employed it in an effort to free up money for business and consumer lending in a market that is essentially void of such at this time.
The fear is that if the EU does not act soon, the Euro could rise to $1.60 versus the Dollar and reach and even exceed parity with the Sterling – a move that would virtually lock out European exports from most major countries.
At Friday’s close, the Euro traded down .6% to the Dollar at 1.358 although for the week the Euro was up over 5% versus the greenback. The Euro traded down to the Pound to close at .9386, down 1/3rd to the Swiss Franc to 1.5294 and up nearly 1% to the Yen to 130.31.
USD
The US Dollar had a rebound on Friday; however it did have the largest weekly fall since 1985 against a basket of major currencies. The fall of the dollar was spurred on by a decision last Wednesday by the US Federal Reserve to purchase more than one trillion dollars worth of long-term US government debt – which is kind of like taking money from your left hand pocket and putting it into your right hand pocket. The money the fed used was “new” money – freshly printed for that matter – and that was seen as flooding the market.
Analysts are expecting the dollar sell off to continue as the US government nears three trillion dollars worth of new spending to help curb the recession. At a certain point the US runs the risk of devaluing their currency – which would have a trickle down affect on imports as well as the sale of government debt. Some analysts are predicting a collapse of the US’s standing as a safe haven currency because right now it is hard to see it sustained as such with record deficit and an overall astronomical national debt that would take at least fifteen years to pay down. The last such country to do something similar to the US was Zimbabwe – and we all know how that turned out.
The Dollar closed up 1 ½% to the Yen to 95.93, up ¼% to the GBP to 1.4459, up .1% to the Canadian Dollar to 1.2411 and down .35% to the Australian Dollar to .6872.
Chart EUR/USD – 30 Day
The Dollar seemed to be holding its own until the US government began unveiling their spending plans. The chart below shows a direct correlation between the various spending bills and their effect on the value of the Dollar against the Euro. To think this is coincidence, one only needs to look at the USD versus every major currency and a similar pattern will be revealed. IN the past 30 days, the Dollar has lost over 7% to the Euro – a staggering number. And many are predicting that this could just be the beginning if the US keeps spending AND if the EU does not implement a more aggressive approach to its handling of the recession. $1.3750 is the next resistance level and if it should hit that the next level up would be $1.3950. It is expected that the Euro to break through both levels in the near term.
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