What is behind the recent fall in the Euro?

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by Shaun Richards

It has been a while since we dropped into the currency market and we can look at an event that is regularly predicted on social media and the like but happens much less in reality. That is a period where the Euro is struggling against its peers. Indeed even a traditional Euro bull ( at least against the UK Pound £) has noted this.

The result has been a sharp decline in the euro against the dollar — the most heavily traded exchange rate — ending a period in which currencies had largely shrugged off the turmoil raging in bond markets………The euro sank below $1.13 on Wednesday, its weakest level since July last year and a swift decline from nearly $1.16 in the middle of last week. ( Financial Times)

This raises several issues. The first is that we are in a “Hollar Dollar” phase so we need to look wider. Next this was ECB policy as those who recall past updates will know that it started some open mouth operations around the 1.18 level. Of course the situation around that has changed because a lower exchange rate versus the US Dollar is inflationary and the ECB may want everyone to forget it was trying to raise inflation into a surge in it.

Eurozone consumer prices have also accelerated, with annual gains reaching 4.1 per cent in October, according to Wednesday’s figures,

But if we look back to the 5th of January I noted this.

The European Central Bank is closely monitoring the euro’s strengthening against the U.S. dollar, Governing Council member Olli Rehn says

Adding this.

Regular readers will recall that what used to be called jawboning but these days are called open mouth operations began around 1.18 versus the US Dollar and we are now at 1.2275 as I type this. So we see that even adding the vocal weapon to the money printing I will come to in a moment is not stopping the Euro’s rise.

As you can see it is weaker now and the ECB has made a clear mistake with inflation where it is. Perhaps the FT has simply forgotten the previous phase. Although one may argue that the rhetoric was just that.

Looking Wider

The best test of a currency’s strength is its trade-weighted or effective index. Here we get something of a different story because looking at the ECB chart versus 42 other currencies the first thing that stands out is a rally. from 104 in the spring of 2015 to a peak of 122.3 at the end of 2020. There has been a decline since to 117.9 so the recent decline is reversing part of what was a long rally.

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In terms of the UK then the Pound has been strengthening through 2021 and has nudged above 1.19 over the past 24 hours. We can flip to an area of possible support though because we have also got near to 1.05 versus the Swiss Franc. A week ago the Swiss National Bank reminded us of this.

“You’ve seen recently there has been quite an appreciation of the Swiss franc,” Maechler said. “Now if you look at the real exchange rate, it’s still higher than 2015,…..The SNB remained committed to forex market purchases where appropriate, seeking to have the maximum impact with the minimum intervention, she said.

I think we are in the zone where it might appear again. So there may be some relief on the offing.

One area where the Euro has seen a rally is versus the Turkish Lira which has been heading south against pretty much everything in response to the President Erdogan strategy of cutting interest-rates into an inflation rise. By the time you read this we may have seen another phase in that.


The Financial Times view is based essentially on relative interest-rates. But I think it is more complex than that.

Traders are dialling up their wagers that the Federal Reserve and Bank of England will lift rates from historic lows over the next year at a time when the ECB is pushing back against market expectations that it too will lift borrowing costs in 2022.

The easy part is that the ECB has no plans to raise interest-rates meaning that for once President Lagarde is telling the truth. On the other side of the coin I am not so sure that the second incarnation of the Unreliable Boyfriend at the Bank of England will raise interest-rates anytime soon. As we are waiting to see who the next Fed Chair will be I would not be rushing to pronounce their either.

There is a little more solid ground beneath relative QE trends and hence likely money supply. Here the US Fed has begun to Taper albeit slowly and the Bank of England will soon finish its quota. But ECB QE feels like something Queen sung about.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me


It has been the case that the Euro area trade surplus ( Germany with supporting roles from the Netherlands and Italy) has been a support for the currency. But the surplus does not seem to be what it was.

The first estimate for euro area exports of goods to the rest of the world in September 2021 was €209.3 billion, an
increase of 10.0% compared with September 2020 (€190.2 bn). Imports from the rest of the world stood at €202.0
bn, a rise of 21.6% compared with September 2020 (€166.1 bn). As a result, the euro area recorded a €7.3 bn
surplus in trade in goods with the rest of the world in September 2021, compared with +€24.1 bn in September

Monthly trade figures are far from the best source especially at a time like this but traditional strengths of the Euro area are under pressure such as cars and indeed if we look wider than these goods numbers tourism too.


My own view is that rather than marginal movements in interest-rates the main driver for currencies these days is expected economic growth. This comes with views on interest-rates and QE but these are implied rather then explicit. An element of the better phase for the US Dollar is simply that overall the US economy has done relatively well. Maybe some believed the FT about the UK economy in which case they will have been pleasantly surprised. But the Euro area seems to be struggling on a few fronts.

These are the worsening Covid situation which has especially hit Germany today. The ongoing supply shortages affecting the motor sector. Then there is the energy position where imports are ever more expensive. All of these will be exacerbated if there are more lock downs. Also there are the trade disputes with the UK and the border issue with Belarus before we get to this.

Trafigura chief warns of rolling power outages in Europe this winter ( FT)

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