Opinion

Anatole Kaletsky

Don’t expect the euro’s rally to last

Anatole Kaletsky
Oct 31, 2013 15:05 UTC

What is happening to the euro? Currencies are more important than stock market prices or bond yields for many businesses and investors, not to mention for globe-trotting families and humble tourists. Which makes it surprising that so little attention has recently been devoted to the strengthening of the euro, which hit its highest level since 2011 this Monday, having jumped by 5.5 percent since September and over 8 percent since early July. This remarkable ascent, which has also driven the euro to its highest level against the yen since the 2008-09 financial crisis, means that European exporters are losing competitiveness, Americans and Asians who live or travel in Europe are feeling like poor relations and many economists are starting to worry that Europe’s nascent economic recovery will be snuffed out.

Purely financial players, by contrast, seem to be more enthusiastic about the euro’s strength than they have been for years. Speculative futures bets in favor of further euro appreciation have reached their highest level since the summer of 2011 — and the only time they were higher than that in the past decade was in the period just before the Lehman shock. Significantly, both of these speculative crescendos were followed by sharp euro declines, since currency markets generally turn when bullish sentiment reaches extreme levels. But there is a deeper reason to expect the euro’s seemingly irresistible rise to reverse.

Currencies tend to move in trends for many years, and the fact is that the euro’s long-term trend against the dollar is still almost certainly downwards, despite the big gains of the past few months.

The euro’s long-run trend against the dollar turned down decisively more than five years ago. Since the euro hit an all-time peak of $1.60 in April 2008 it has moved in several cycles, making lower highs and lower lows. The previous peak before this week’s was in April 2011 at $1.48 and the one before that was in November 2009 at $1.52. The subsequent lows, in June 2010 and July 2012, were both around $1.20. It seems reasonable to expect this level to be tested again in the next year or so.

The direction of the dollar’s long-term trend against the euro (and before that the deutsche mark) has always been determined mostly by events in America, rather than Europe. The dollar rose strongly from 1980 to 1985, driven by the surging confidence in U.S. geopolitical power and economic revival under Ronald Reagan. The dollar then fell even more sharply from 1985 to 1991, as Presidents Reagan and then Bush consciously pursued a policy of dollar devaluation. After trading sideways until 1995, the dollar then appreciated strongly again until 2001 as the U.S. enjoyed the extraordinary economic growth and fiscal improvement under President Clinton, with the federal budget deficits completely eliminated for the first time. This trend reversed within weeks of President George W. Bush’s election and the dollar declined almost monotonically from January 2001 until April 2008.

Britain’s strength is its weakness

Anatole Kaletsky
Feb 14, 2013 16:19 UTC

Mirror, mirror on the wall, who’s the weakest of them all? As G20 finance ministers warn of the threat of a “global currency war” at their meeting in Moscow this weekend, two odd features of this looming financial conflict tend to be overlooked.

The first is that every country’s objective in this war is to “lose” by making its currency weaker. This is because a weak currency tends to support exports, employment and economic growth (if all other things are equal, which they never quite are). The second oddity is that the clear winner in this global currency war has not been Japan, Switzerland, China or any of the other usual suspects, but a country rarely accused of financial aggression: Britain.

Since the global financial crisis started in mid-2007, the pound sterling has been, by a wide margin, the weakest major currency. The Bank of England’s trade-weighted sterling index fell by a record 30 percent in early 2009 and, despite a modest rebound in 2010-12, it remains 24 percent below its level of mid-2007. Japan, by contrast, has endured a rise in its trade-weighted exchange rate of 60 percent from July 2007 to late last year, when Prime Minister Shinzo Abe committed his new government to a more competitive rate. Japan is therefore fully entitled to resent other countries’ accusations of currency warfare, when it has in fact been a long-suffering pacifist, exposing its export companies to the full burden of other countries’ post-crisis currency adjustments.

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