Even as central banks around the world aggressively seek to devalue their currencies, the euro has been a pillar of strength, clinging tenaciously to the $1.40 range against the dollar?
It's odd because a) There are neverending funding crises in several eurozone countries and b) a weak euro would greatly benefit those same periphery countries, not to mention export-happy Germany.
So why isn't the euro tanking? Only the naive would suggest that it's because the ECB seriously wants to keep its currency strong.
No, the strong euro is a further sign of deep dysfunction.
Here's the problem. In the US it's simple for Bernanke to weaken the dollar. He can buy US treasuries to reduce interest rates, thus reducing the temptation to hold dollars. It's pretty standard stuff.
But it doesn't work that way in Europe, in fact it does the opposite. The biggest downward force on the euro is the risk of a breakup, and so whenever Trichet intervenes in a market -- say, by buying Irish or Greek debt -- he's actually counteracting that gravitational force. In Europe, loose money is actually a euro positive because it reduces solvency pressure.
Tuesday, November 02, 2010
Publicada por Miguel Madeira em 15:56