{"id":804,"date":"2014-04-11T12:32:24","date_gmt":"2014-04-11T12:32:24","guid":{"rendered":"http:\/\/www.thebizsense.com\/views\/?p=804"},"modified":"2014-04-20T13:05:54","modified_gmt":"2014-04-20T13:05:54","slug":"strong-euro-weak-dollar","status":"publish","type":"post","link":"https:\/\/www.thebizsense.com\/views\/investments\/strong-euro-weak-dollar","title":{"rendered":"Strong Euro, Weak Dollar"},"content":{"rendered":"

\"euro<\/a><\/p>\n

One of the more difficult decisions facing investors is what is going to happen to the euro.<\/p>\n

Not only for those of us who don\u2019t regard it as our base currency. After all, the euro is the world\u2019s most important currency after the dollar. If you fear the impact of a weakening dollar on the value of your savings, you have to look to alternative currencies, of which the euro is the most important.<\/p>\n

Most people think China is now the world\u2019s second largest economy, but the Eurozone is still much bigger. It\u2019s home to some of the world\u2019s most important multinationals, and their shares are open to foreign investors in a way that China\u2019s are not. Its bonds are some of the world\u2019s safest and most tradeable, such as the formidable German government Bunds.<\/p>\n

Looking back through my files reminds me how much the financial media have been filled with pessimism about the euro, largely based on assumptions that the European political elite would be unable to deal with the region\u2019s debt crisis without defaults, a break-up of the zone, or crippling public hostility to required austerity.<\/p>\n

The pessimists have been wrong. Defaults have been limited to a micro-state, Cyprus. The Eurozone shows no sign of breaking up, but instead has been inching towards more centralized fiscal control. Amazingly, the backlash against the pains of austerity \u2013 unemployment, destroyed businesses, cuts in benefits and subsidies \u2013 has been contained in the countries worst affected.<\/p>\n

In terms of the dollar, the euro has been rising in value for almost two years, from below 1.21 to about 1.38 now. This is bad news for the region\u2019s exporters (a strengthening currency makes it harder to compete on world markets), good news for consumers and businesses geared to imported products such as oil (which have tended to become cheaper in euro terms).<\/p>\n

But it creates a worsening problem for policymakers, particularly those at the European Central Bank.<\/p>\n

The Eurozone economy is sluggish, weighed down by an abundance of welfare costs and regulations hostile to economic growth, banks choked with toxic assets, and austerity imposed on the \u201cClub Med\u201d countries by their bloated debt burdens.<\/p>\n

One consequence is extremely low inflation \u2013 now only \u00bd per cent a year. There is an increasing risk that prices will stop rising at all, and start to fall \u2013 deflation.<\/p>\n

All central banks are terrified of deflation, because it makes it much harder to prevent economic slowdown sliding into a depression, and to engineer recovery.<\/p>\n

Over the past five years, when the world has been slowly recovering from the shock of the financial crisis, Europe\u2019s has been the most conservative of the major central banks. While the US, the UK, China and Japan have pursued aggressive easy-money policies, the European Central Bank has done little more than provide unlimited credit to commercial banks. So far, it has avoided quantitative easing (\u201cprinting\u201d money to buy government bonds).<\/p>\n

This may be about to change.<\/p>\n

If economic conditions in Europe worsen, or if the euro\u2019s exchange rates continue to rise and so increase the risks of worsening conditions, that could force the central bank to be much more aggressive in deploying monetary weapons.<\/p>\n

It does face legal constraints that Germany insisted on when the Eurozone was established as the price of abandoning their much-loved deutschemark because of their fear of eventually being forced to go to the aid of profligate \u201cClub Med\u201d countries.<\/p>\n

But Germany has ended up doing that anyway, largely by lending through the Eurozone banking system.<\/p>\n

Politicians and government officials of the European Union and its currency-based sub-group the Eurozone have proved adept at circumventing constitutional restrictions and simply ignoring those who violate them:<\/p>\n