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Dollar and Euro bills
Photo: Gregorio Borgia/AP
No, the euro is now worth no less than the dollar.
And no, if the euro rate in foreign exchange trading fell below the one euro per dollar mark for the first time this week, that doesn't show how weak the euro economy is.
The mock event says more about how little the foreign exchange casino has to do with what would make economic sense than about the euro per se - even if our zealous opponents of the euro try to reinterpret that as evidence of the failed monetary union.
According to the common understanding, currencies are doomed to devaluation if there is a large foreign trade deficit in the country (or currency area) concerned - or higher inflation than the others.
Which would also make sense - at least according to the textbook: whoever has an export weakness devalues, which makes exports cheaper abroad and helps to boost sales.
problem solved.
Reality check for the current situation: both non-existent.
In the euro zone, surpluses have been generated in the export-import business for years.
And inflation has been lower for years than in the USA or Great Britain.
Which is the case even now – the British and Americans currently have higher inflation than, for example, the Germans.
The euro should therefore appreciate rather than depreciate.
If it devalues now, exports will become cheaper - and the export surplus with the Americans will tend to be even larger.
oddity.
The fact that the euro has now fallen below the supposed parity does not say anything about whether you get more for one euro in America than at home - or vice versa.
Especially not that it has been less since reaching the 1:1 mark.
Current estimates come to completely different conclusions - and also to the fact that the foreign exchange markets should actually go in the other direction: The industrialized countries organization OECD regularly calculates and compares the exchange rate at which both sides would have the same purchasing power - i.e. when you can buy in the USA Money would get the same as with us.
Accordingly, as of 2021, the euro would have to rise to something like 1.30 euros per US dollar – and not fall.
The legendary Big Mac Index, which the “Economist” regularly calculates based on a simple comparison of the respective prices for a dish from a well-known fast-food supplier, produces similar results.
According to this, the euro was undervalued by almost 15 percent at the beginning of 2022.
If it falls now, with US inflation still higher, the economic problem will only get worse.
The catch is that the foreign exchange casino is only partially concerned with such fundamental data - and the correction mechanism is therefore suspended.
As evaluations have shown for years, trading with currencies is always dominated by a very short-term argument: the question of where to get the higher interest rates.
You can make quick money with quick trades.
If there are higher interest rates on the dollar, as is the case now - simply because the US Federal Reserve is currently raising rates more quickly in view of more sensitive inflation - investors will switch from the euro and other currencies to dollars.
Which increases the demand and the price – i.e. the dollar exchange rate.
Then there is the usual herd instinct – and some speculation on supposedly magical parity.
The euro is already down – although it should actually be up.
It is one thing that this causes a lot of perverse excitement in Germany.
The other thing is that all of this only makes limited sense economically.
Why should US exporters have a harder time now – when the trade balance has been in deficit for years?
And the textbooks recommend a weaker dollar exchange rate in such cases?
Why is the euro depreciating so much - even though the fundamentals themselves haven't changed that much - and even inflation is lower?
According to the Big Mac index, there were only two currencies that were overvalued against the US dollar at the beginning of 2022 - the Swiss franc and the Norwegian krone.
Compared to everyone else, the dollar was too expensive - not because the country is so unbeatable, but because the dollar is simply in high demand.
Whether as a security currency or for higher interest rates.
If all of this should cause excitement, it's more about what a few investors play every day -- and get rich quickly.
And how little that fits in with what would make economic sense.
Then the question would be more about what should one day take the place of a system that only makes very limited sense.
And if the time hadn't come to check exchange rates more closely again.
As was the case in the post-war period with the Bretton Woods system of fixed but politically adjustable rates.
Then, in case of doubt, no more money could be made in the foreign exchange casino.
But it would be better for the rest of humanity.