A too much strong euro for such a weak euro zone

Draghi maintains that an euro around $1.40 does not have to affect prices’stability. Many experts, however, do think that strength of common currency can near even more deflation ghost to euro zone’s economies. Four percentage points of inflation may mean nothing when prices are over 2%, but they are important if prices are under 1% (euro area’s case) or in red (Spain’s case).

ECB’s lack of response has been one of the reasons behind strong euro’s appreciation. It also has forced analysts’ firms to revise their medium term estimations about exchange rate. Most of them forecast now that euro will move around $ 1.38 in this year first semester, although it could be lose positions in the second year tranche whenever U.S. economy recovers strongly and the Federal Reserve fixes its orderly withdrawal of monetary stimulus.

The euro came to Europe’s real life in January 1st of 2002 under U.S.dollar’s price ($1 cost €1.16) but it reached parity in 2003. When crisis started it already moved around $ 1.28. Now it nears  1.40, which is at the high end of last year foreign exchange.

There are some factors explaining this move upwards. First of all are prices: as they decline, currency trends to further appreciation. Secondly, diferences between monetary policy of U.S. and euro zone’ central banks. While  the Fed has increased its balance by more of 550% since the euro was born, the ECB’s grew by 167%. Another reason is euro area’s surplus against U.S. current account deficit.

Eurozone’s surplus lives together with some of their economies’ weak growth.  For many market watchers, an euro which is too much strong will not help recovery, so that ECB should take action in this matter.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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