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6 Jan 2015
Euro-Dollar exaggerates the euro's depreciation – BBH
FXStreet (Barcelona) - Mark Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, explains why Euro’s decline against the USD has not been supportive for the eurozone economy, and expects that a further decline in euro on a trade-weighted basis to eventually support the regional economy.
Key Quotes
“The euro has declined roughly 13% against the dollar over the past six months. This is supposed to be stimulative for the eurozone economy, but it remains moribund. What gives?“
“Part of the problem is that the bilateral exchange rate is not the proper metric in this context.”
“One of the reasons then that the decline in the euro has not provided much support for the economy is that the depreciation has been so minor. Prior to monetary union, Europe was mostly relatively small and relative open (measured by exports plus imports as a percentage of GDP). Since monetary union, it is larger but relatively closed. This means that the euro area as a whole is less sensitive to the currency depreciation than the individual countries were before EMU.”
“In some ways, a similar argument applies to the decline in oil prices. Much has been made of the dramatic decline in the price of oil, but it too does not appear to have lending much support to the eurozone.”
“The euro may not be as sensitive to its decline against the dollar or to the decline in the price of oil as some might have expected. Nevertheless, the laws of economics have not been repealed."
"A further decline in the euro on a trade-weighted basis, and a further decline in oil prices, both of which seem very likely, will eventually lend support to the regional economy.”
Key Quotes
“The euro has declined roughly 13% against the dollar over the past six months. This is supposed to be stimulative for the eurozone economy, but it remains moribund. What gives?“
“Part of the problem is that the bilateral exchange rate is not the proper metric in this context.”
“One of the reasons then that the decline in the euro has not provided much support for the economy is that the depreciation has been so minor. Prior to monetary union, Europe was mostly relatively small and relative open (measured by exports plus imports as a percentage of GDP). Since monetary union, it is larger but relatively closed. This means that the euro area as a whole is less sensitive to the currency depreciation than the individual countries were before EMU.”
“In some ways, a similar argument applies to the decline in oil prices. Much has been made of the dramatic decline in the price of oil, but it too does not appear to have lending much support to the eurozone.”
“The euro may not be as sensitive to its decline against the dollar or to the decline in the price of oil as some might have expected. Nevertheless, the laws of economics have not been repealed."
"A further decline in the euro on a trade-weighted basis, and a further decline in oil prices, both of which seem very likely, will eventually lend support to the regional economy.”