Tuesday, December 6, 2016

Falling euro driven by low interest rates and political risks.

Why has the euro fallen so much against the dollar?  The WSJ has this take:
The U.S. Federal Reserve is moving away from monetary easing, while the European Central Bank is deep in an experiment of negative interest rates. To a large degree, a weak euro is a good thing for the eurozone’s efforts to build exports and return ultra-low inflation to healthier levels.

Recall that low European interest rates lead (i) investors to search for higher returns elsewhere (selling euros to buy dollars), and (i) foreign borrowers to borrow in euros and invest in their domestic economy (again, selling euros to buy dollars.)

But the there are also political risks.  With weaker economies, like Greece, unwilling to adopt reforms that would lead to growth, and stronger economies, like Germany, unwilling to bail them out, the future of the Euro is uncertain.  Elections in 2017 will pose further tests.
Consulting firm Bain & Co. has told clients to “withhold new investments” in Western Europe, warning that a breakup of the euro is likely.

No comments:

Post a Comment