Euro

The last two years have witnessed a veritable collapse in
the value of the Dollar, which has declined over 25% against the Euro, alone.  While opinion remains divided, many analysts
are predicting a (temporary) cessation in the Dollar’s downward slide.  The reasoning is that the worst possible
scenario involving the American housing crisis has already been priced into the
Dollar.  Furthermore, experts argue that
the inevitable loosening of American monetary policy will help boost the
American economy by preventing it from slipping into recession. Finally, there is the notion that China will
begin to take steps to appreciate its currency relative to the Euro, which has
actually risen against the RMB.  The law of
triangular arbitrage requires that any rise in the Euro against the Yuan must be
matched by a proportional rise in either the Dollar/Euro or the Dollar/RMB rate,
the latter of which seems unlikely.  Dow Jones reports:

There is also the possibility that official Chinese
purchases of the euro could decline after last week’s visit by a delegation
from the European Central Bank to Beijing, anxious to reduce upward pressure on
the single currency.

Read More: Chances Of Dollar Bounce May Be Rising

Original post by Jimmy Atkinson and software by Elliott Back

In the campaign to pressure China into revaluing the Yuan, the US has by far been the loudest voice.  However, the rapid decline of the USD may have unintentionally earned the US a new ally in its fight: the EU.  Since the Chinese Yuan is essentially pegged to the USD, and the USD has declined against the Euro, the law of triangular arbitrage is such that the Euro has actually appreciated significantly against the Chinese Yuan.  EU officials are no longer standing by idly, since the exchange rate is beginning to deal serious harm to its balance of trade.  In fact, the EU now occupies third position on the list of countries with the largest trade deficits with China.  Because of the nature of China’s exchange rate regime, however, China’s ability to control the relationship of the Yuan with both the Euro and the USD will be difficult, if not impossible.  The Bangkok Post reports:

Given the fact that about 70% of China’s $1.4 trillion in foreign reserves are dollar-denominated assets and the majority of foreign trade transactions are cleared in US dollars, China has focused more on the RMB-dollar rate.

Read More: A tale of two currencies

Original post by Jimmy Atkinson and software by Elliott Back

At its last meeting, the European Central Bank (ECB) voted to maintain rates at current levels.  Nonetheless, inflation risks persist, and the ECB has not ruled out the possibility of hiking rates at its next meeting. At the same time, the Euro-zone economy is stalling, and the Bank has the onerous task of balancing these risks in trying to facilitate a "Goldilocks" economy. As a result, the ECB is in "information-gathering mode." Additionally, most of this information is publicly available economic data, and forex traders would be wise to do their own research, since the Euro-USD exchange rate outlook is tied closely to the monetary policy outlook. The Guardian Unlimited reports:

The ECB has said that slower growth in the 13-nation region would have an impact on its policy-relevant medium-term inflation outlook, and Gonzalez-Paramo said currency movements were one factor affecting growth.

Read More: ECB still in data-gathering mode

Original post by Jimmy Atkinson and software by Elliott Back

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.

Read More: Dollar hovers above lows

Original post by Jimmy Atkinson and software by Elliott Back

Evidently frustrated by the Euro’s appreciation against the
USD, a group of EU ministers has turned its attention to China, calling
on it to allow the Yuan to appreciate against the Euro.  While the Yuan has appreciated nearly 10%
against the USD over the last two years, it has actually decreased in value
against the Euro.  As a result, the EU
trade deficit has set a fresh record nearly every month. Unfortunately, the Yuan basically remains
pegged to the USD, and since the USD is depreciating faster against the Euro
than against the Chinese Yuan, the law of triangular arbitrage dictates the
Euro must be appreciating against the Yuan.  It appears China’s hands are tied.  Bloomberg News
reports:

“I can assure you China will continue to adopt a
reform oriented policy on its exchange-rate mechanism,” said a Chinese Foreign
Ministry spokesman. “But these
adjustments have to be done gradually and in line with the market.”

Read More: EU Calls on China to Let Yuan Appreciate Against Euro

Original post by Jimmy Atkinson and software by Elliott Back

Euro sets another record

Today, the Euro set another record, breaching the $1.40 mark.  While theoretically a meaningless achievement, $1.40 was an important psychological and technical barrier, since many traders place stop orders and limit orders at round numbers, such as $1.40.  Accordingly, upon surpassing $1.40, the Euro quickly accelerated upward, creating a short squeeze, where those who bet the Euro would not pass $1.40 were forced to buy to cover their positions. EU politicians have been surprisingly quiet as the Euro rose rapidly against the Dollar, commenting only that they would monitor the situation.  However, it seems inevitable that the value of the Euro will begin to play a more serious role in EU economic policy, since it is already beginning to hamper growth.  AFP News reports:

“Excessive volatility and disorderly movements in exchange rates is undesirable for economic growth,” European Central Bank president Jean-Claude Trichet said.

Read More: EU finance chiefs on guard over euro strength, market turmoil

Original post by Jimmy Atkinson and software by Elliott Back

That the balance of trade between the US and China is becoming more and more lopsided in favor of China should come as no surprise to
anyone.  In fact, economists yawned when
the August trade data revealed a 33% jump in the Chinese trade surplus.  As a result, many are beginning to argue that China can allow the Yuan to appreciate at a faster
pace against the Dollar, since it is obvious that China’s export sector will not be materially
affected by a stronger Yuan.  In
addition, China now exports more goods and services to the EU than to America,
yet another statistic which supports the notion that China can allow its
currency to appreciate against the Dollar (the implication here being that the
Euro-Yuan exchange rate should be more important to China at this point).  Finally, China’s inflation rate is now
hovering around 6.5%, its highest level in over a decade.  A more valuable Yuan would presumably make
imports less expensive, thus lowering prices across the board for Chinese
consumers. Bloomberg News reports:

The Chinese currency is selling for about 7.51 to the
dollar. It has risen almost 6 percent against the U.S. currency in the past year while falling more than 3 percent against the euro,
leaving the overall competitiveness of China’s exports little changed.

Read More: Rising Euro Is What China Needs to Dump Dollar

Original post by Jimmy Atkinson and software by Elliott Back

The Euro is closing in on the record high it achieved
against the Dollar in July.  Once again,
it is the interest rate story which is driving the currency skyward.  The continued rise of the collective economies
of the EU is coinciding with a decline in the American economy, spurred by
falling prices in the real estate and capital markets. As a result, economists are forecasting that
this month’s respective central bank meetings will bring about a rate hike in
the EU and a lowering of rates in the US. This prediction, which is also supported by the prices of interest rate
futures, would narrow the EU-US interest rate differential to just 75 basis
points!  Bloomberg News reports:

Traders also added to wagers the euro will strengthen against the U.S.
dollar, figures from the Washington-based Commodity Futures Trading Commission
showed on Sept. 7.

Read More: Euro Rises to
Month-High Against Dollar on Growth, Rate Views

Original post by Jimmy Atkinson and software by Elliott Back

Credit problems in the US have been the source of much turmoil throughout the global markets in the past few months. Tuesday was good for the US dollar, which held strong against both the yen and the euro. However, forthcoming economic reports from the US may or may not tip the scales. According to Reuters:

"The panic is almost over, but the market has lost its direction and is
waiting for more news, especially any good news," said Kikuko Takeda, a
currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Read more: Dollar drifts as U.S. data awaited for direction

Original post by Amy Cottrell and software by Elliott Back

The US subprime mortgage and credit sectors are in dire straits, which has investors around the globe scrambling to save their money. From Europe to Asia, everyone is experiencing shockwaves. Now, the euro can be counted amongst the Australian dollar and British pound sterling as an increasingly weakening currency. According to Reuters:

The euro hit a six-week low
versus the dollar and a four-month low against the yen on
Tuesday on a Spanish press report that Santander (SAN.MC: Quote, Profile , Research) is
facing $2.2 billion euro exposure to high-risk U.S. loans.

Read more: Euro falls as European exposure to US credit weighs

Original post by Amy Cottrell and software by Elliott Back

The Euro’s rise against the USD over the last year has been
swift and unimpeded.  Many commentators
have theorized that it is intense pessimism surrounding the US economy and
economic conditions-namely the burgeoning twin deficits-that is responsible for
the Dollar’s demise.  Now, a new theory
is being batted around, one that is quickly gaining traction with analysts:
perhaps it is optimism directed towards the EU economy rather than pessimism
towards the US that is causing the Euro to spike.  After
all, the European economy has rebounded nicely and boasts stable monetary and
trade statistics.  However, this notion
of European optimism, if it in fact exists, has some analysts worried that the
markets are becoming too optimistic, and that if they are not careful,
they will end up wrecking the European economy by driving up the Euro too high.
The Times Online reports:

If the euro keeps rising without limit, Europe’s export
industries will be decimated, as they were not only in Britain, but also in America in the mid-1980s and also in Japan after 1995.

 
Read More: The euro’s rise and rise is unsustainable

Original post by Jimmy Atkinson and software by Elliott Back

The Norwegian Krone is certainly not a very popular currency
among participants in the forex markets.  Nonetheless, the currency has enjoyed a strong
year, having moved away from clinging to the coattails of the Euro and has actually
surpassed the common currency by a considerable margin.  In fact, the Krone recently touched a 10-month
high against the Euro, and a multi-year high against the USD, spurred on by a
rate increase by the Central Bank of Norway.  In addition, the consensus among analysts is
that the Central Bank will hike rates several more times over the next year,
bringing the benchmark rate to 5.75% by 2008.  Surely, the most opportunistic among us has
already begun searching for a broker that facilitates trading in Krone!

Read More: Norwegian krone jumps as central bank hikes
interest rates

Original post by Jimmy Atkinson and software by Elliott Back

With the Euro handily outperforming the USD, Japanese Yen
and certain other major currencies, many EU leaders have begun lamenting the
impact they foresee on the EU economy. As most amateur economists are doubtlessly aware, however, there is a
tradeoff between control over one’s currency and control over one’s domestic
economy. In other words, if the EU acted
in concert to hold down the value of the Euro, the ability of the European
Central Bank to conduct monetary policy would be severely constrained. Accordingly, Jean-Calude Trichet, President
of the ECB, is insisting that any efforts directed towards holding down the
Euro be political, rather than economic in nature. Surprisingly, he is not opposed to EU
political leaders holding talks with their Japanese and possibly American counterparts
to discuss the growing perceived “misalignment” between the Euro and the
Dollar. The Financial Times reports:

Mr Trichet had made it very clear in his comments to the
European Parliament last week that there should be a dialogue between European
countries and their partners over currency matters.

Read More: View of the day: Currency misalignment 

Original post by Jimmy Atkinson and software by Elliott Back

The political furor surrounding the soaring Euro is reaching
fever pitch, as European politicians clash with central bankers over the role
of the state in determining exchange rates. Jean-Claude Trichet, President of the European Central bank (“ECB”) has
argued that the Euro should be valued strictly by the markets. Politicians from EU-member states, on the
other hand, have frequently argued that the surging Euro is hampering economic
growth and should be used as a tool in economic policy-making. The newly-elected president of France,
Nicolas Sarkozy, has been a vocal critic of the ECB, arguing that the Euro
should actively be held down. The
Financial Times reports:

In contrast to the
US and Japan, where the finance ministry sets the exchange rate regime and
intervenes in exchange markets, eurozone central banks hold and manage foreign
exchange reserves and have responsibility for any market intervention.

Read More: ECB takes aim at Sarkozy over euro

Original post by Jimmy Atkinson and software by Elliott Back

As we wrote last week, the direction of the Dollar may be influenced more by external economic events rather than by internal activity.  Accordingly, it would behoove forex traders to direct their attention away from the Fed and towards the Bank of England and the European Central Bank, both of which face important monetary policy decisions later in the month. With regard to the Bank of England, futures markets have priced in a 2/3 chance that rates will be cut by 25 basis points. In the case of the ECB, the markets are expecting rates to be maintained at current levels. However, analysts will be scrutinizing the Banks’ respective press releases and monitoring other developments in this area due to the implications for the US-EU-Britain interest rate differential.  Reuters reports:

Some analysts think that hawkish comments from Trichet will
be brushed aside with weaker economic data leading to the
prospect of falling euro zone rates later in the year.

Read More: Pound down, others flat before ECB, BoE decisions

Original post by Jimmy Atkinson and software by Elliott Back

When America’s dot-com bubble collapsed in 2001, the Federal Reserve Bank moved quickly to quell the panic by slashing interest rates.  The European Central Bank (ECB), on the other hand, was adamant that it would not have to follow suit since the European and American economies were no longer so intertwined.  Several months later, it became increasingly clear that the ECB was wrong, and it was ultimately forced to lower rates.  Now, some analysts fear that history is repeating itself, as America’s housing crisis threatens to run a similar course as the collapse of the stock market bubble. The Fed has lowered interest rates twice in the last few months, while the ECB has yet to act, insisting that its primary concern is inflation. For now, the interest rate differential is supporting the Euro, but if the ECB falls behind the curve, a stagnating EU economy could bring down the common currency.  The New York Times reports:

But when it comes to the economy, Europe remains optimistic it can
decouple itself and withstand collateral damage from a possible
recession in the United States.

Read More: Why the European Bank Is Sitting Back

Original post by Jimmy Atkinson and software by Elliott Back

At its meeting last week, the European Central Bank (ECB) held its Euro-zone benchmark lending rate at 4.00%.  While the decision itself came as no surprise, analysts were nonetheless waiting with baited breath to hear what remarks would accompany it.  Jean Claude Trichet, the Bank’s President, eased up on hawkish comments he made the previous month, when he signaled that his primary concern was inflation rather than the risk of economic recession. This month, however, he changed his rhetoric markedly, indicating that the ECB was less willing to preempt rising price levels and would instead shift its focus to the possibility of a ’sharp slowing’ of EU growth. Forbes reports:

Our view [is] that rate hikes are
definitely off the agenda at this stage and by bringing a greater
degree of uncertainty on the growth assessment, the ECB may be getting
ready for a shift towards a more dovish policy language.

Read More: Euro sags after Trichet tones down hawkish stance

Original post by Jimmy Atkinson and software by Elliott Back

Last week, the USD recorded its best weekly performance since 2006, rising 3 cents against its chief rival, the Euro.  Apparently, analysts are becoming increasingly pessimistic about the effect of the America recession on the global economy.  The consensus is now that a dampened global economy will induce a trend towards risk aversion, which favors the world’s #1 and #2 reserve currencies, the Dollar and the Euro, respectively.  However, it also appears the near-term economic prospects for Europe are less rosy than originally forecast,.  Thus, if last week is any indication, the Dollar should receive a larger proportion of risk-averse capital. Reuters reports:

"Despite a torrent of bad economic news the dollar has been
on a tear this week, as the currency market recognized the fact
that the slowdown in U.S. economic activity is likely to drag
down growth in the rest of the G10 universe…"

Read More: Dollar set for biggest weekly rise since June 2006

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, the European Central Bank (ECB) maintained its benchmark lending rate at 4%.  Meanwhile, America’s Federal Reserve Bank has cut rates by 2.25% over the last six months.  For years, the ECB existed entirely in the shadow of the Fed and conducted monetary policy accordingly, but in this latest downturn, it seems to have broken free. The reason for the split can be found in the Central Banks’ different mandates: the Fed aims to promote growth, while the ECB is charged primarily with creating price stability. Thus, the ECB can easily avoid succumbing to analysts’ expectations that it will ultimately lower rates.  In addition, while EU politicians are pressuring the ECB to hold down the common currency, the ECB’s mandate is actually supported by the expensive Euro because it lowers the cost of imports. The New York Times reports:

Mr. Trichet has long held that central banks do their best work when their threats to raise interest rates deter inflationary actions in the first place, avoiding the need for excessive swings in the benchmark rate.  [He] called this concept “credible alertness.”

Read More: In Europe, Central Banking Is Different

Original post by Jimmy Atkinson and software by Elliott Back

Over the last couple weeks, the Dollar has plummeted against all of the major currencies, falling below the $1.50 mark against the Euro for the first time ever.  It seems investors are reacting to a spate of negative economic data which are painting an increasingly bearish picture for the US economy.  In addition, the Fed seems likely to lower rates further while the ECB will maintain rates at current levels. For a brief period, talk of recession was actually helping the Dollar, as investors predicted that the global economy would be harmed more than the US economy, but it looks like that period has passed. As a result, the EU is growing increasingly alarmed, and the pressure is building for some kind of intervention.   AFX News Limited reports:

Euro group president Jean-Claude Juncker said currency markets are overreacting to the short-term outlook for the US economy. " We don’t like excessive volatility in exchange rates," Juncker said.

Read More: Euro group’s Juncker says currency markets reacting too hastily to US outlook

Original post by Jimmy Atkinson and software by Elliott Back

Over the weekend, Bear Stearns, a prestigious American investment bank,
hurriedly scrambled to find a buyer in order to avoid having to file
for bankruptcy. While a buyer (JP Morgan) was ultimately secured,
investors remained jittery, as the collapse of this magnitude is virtually unprecedented.  When forex markets
re-opened on Monday, the Dollar crashed against all of the world’s
major currencies, namely the Euro and the Yen. Furthermore, analysts
are now beginning to view forex intervention as increasingly likely. It’s
still unclear whether the Bank of Japan or the European Central Bank
(with or without support from the Fed) would spearhead any
such intervention.  At the breakneck speed at which events are unfolding,
however, no one will be surprised if a plan is quickly cobbled together. The Wall
Street Journal reports:

"Were such intervention to be seen, (the euro) could briefly trade down
to $1.55, yet unless the (ECB) is prepared to back up such intervention
with a rate cut, intervention will be futile," said [one analyst].

Read More: Dollar’s Slide Keeps Pace

Original post by Jimmy Atkinson and software by Elliott Back

Two American economists recently conducted a computer simulation to determine how the role of the US Dollar as the world’s reserve currency will evolve over the next decade.  Their hypothesis- that the Dollar’s preeminence would be maintained- was contradicted by the simulation leading them to conclude that the Euro will overtake the Dollar within the next 10-15 years. This may be hard for many analysts to stomach, since the Dollar’s share in global currency reserves is 66%, compared to the Euro’s 25%. In addition, the Dollar has held its title for nearly 150 years, and it’s difficult to fathom its being replaced.

However, two factors have emerged within the last 10 years, lending support to the argument.  First, the US twin deficits have exploded; the current account deficit approximates $800 Billion and the national debt is estimated at $9.4 Trillion. Second, prior to the inception of the Euro, there didn’t exist a credible alternative to the Dollar. The Deutsch Mark and Japanese Yen initially seemed like potential candidates, but the German currency was folded into the Euro, and the Japanese economy has soured and taken over by deflation. Then there are peripheral factors, like US monetary policy, which is facilitating inflation and eroding the Dollar.  There are also signs that a neo-imperialist foreign policy has overstretched the US, and foreign Central Banks are becoming nervous.  The Financial Times reports:

Many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable.

Read More: This crisis could bring the euro centre-stage

Original post by Jimmy Atkinson and software by Elliott Back

Original post by Jimmy Atkinson and software by Elliott Back

In a research note, two economists from Morgan Stanley predicted that the Euro will soon come crashing down, failing in its bid to rival the Dollar as a viable reserve currency. They observed that in the beginning of the decade, the Euro was viewed as joke from an economic standpoint. Since long-term economic fundamentals can’t reverse themselves in only a few years, they reasoned that the Euro’s rise must instead be a product of financial (capital flows) trends. Furthermore, as the EU becomes further integrated, a need will develop to diversify capital outside of the EU, thus reversing the trend of the last few years of diversification within the EU. The Globe and Mail reports:

The euro is overvalued because institutional investors…world
have been diversifying out of their home markets at the same time as
European investors have largely been diversifying within their home
market.

Read More: The euro as reserve currency? Hah!

Original post by Jimmy Atkinson and software by Elliott Back

The U.S. Federal Reserve Board [is] nearing the end of its interest rate-cutting cycle, the European Central Bank [is] likely to reduce rates before the end of the year, and things might not get much worse for the U.S. economy. That suggests the dollar may recover in the coming months, with or without official intervention.

Original post by Jimmy Atkinson and software by Elliott Back

2008 has witnessed a rapid appreciation in the Euro, which recently breached the psychologically important $1.60 barrier. Last week, however, the Dollar dramatically reversed course, leading many traders to speculate that the Euro’s best days may be temporarily behind it. There are two ideas underlying this theory. First, the Federal Reserve Bank is probably near the end of its tightening cycle, while the ECB has yet to begin. In addition, recent economic data suggests that the Euro-zone economy, which has appeared recession-proof in spite of the credit crisis, may soon falter. The best-case scenario, according to Dollar bulls, would be a loosening of monetary policy in the EU simultaneous with tightening in the US. If such a scenario were to obtain, it would bridge the interest rate differential between the two economies, which many believe is behind the weakness in the Dollar. The Wall Street Journal reports:

If bad news out of Europe starts to accumulate and the Fed stands pat, the dollar’s slide could taper off.

Read More: An Endgame for the Euro?

Original post by Jimmy Atkinson and software by Elliott Back

The anecdotal evidence for surging retail interest in forex is cropping up everywhere. Moreover, investors are no longer even limiting themselves to the spot market, utilizing derivatives to speculate on future exchange rates. In the UK, for example, 10% of investors intending to purchase real estate in the EU are utilizing forward agreements to hedge their exposure to the Euro, which has risen 10% against the Pound since the beginning of 2008. Evidently, prospective home buyers are hoping that the Euro returns to 2007 levels, which would significantly lower the cost of buying property there. However, if the Euro continues to appreciate, such investors could end up losing more than they bargained for. Homes Worldwide reports:

Even the movement in the markets over a couple of days can make the
difference between owning a property and no longer being able to afford
it.

Read More: Brits Gambling On Volatile Currency Markets

Original post by Jimmy Atkinson and software by Elliott Back

Earlier this week, the Forex Blog speculated that the tide was turning on the Euro, which  had retreated from the $1.60 threshold. Sure enough, the month of April saw the best monthly performance by the Dollar in over two years. The sudden about-face by the Dollar stems from changes in interest rate expectations. Only a couple weeks ago, the consensus among investors was that the Fed would cut rates further at its next meeting; the only point of uncertainty was whether rates would be cut by 25 or 50 basis points.

As of today, however, there is only a 25% chance that the Fed will cut rates at all, if you go by futures prices. Regarding the Euro, investors are no longer so sure that the ECB will hike rates in response to surging inflation. In short, the new consensus is that the US/EU interest rate differential has stabilized. Then there is the economic picture; investors have "chosen" to be pleasantly surprised by the most recent economic data. While the economic downturn still seems inevitable, it may not be as severe as investors had previously feared. Reuters reports:

In contrast to slightly stronger U.S. data, the Ifo German
business sentiment index this week showed the biggest monthly
fall since September 2001.

Read More: Dollar heads for best month in 2-1/2 years

Original post by Jimmy Atkinson and software by Elliott Back

The anecdotal evidence that China is diversifying its forex exposure
away from the Dollar continues to mount. To date, most of the focus has
centered around the Central Bank of China, which is passively
diversifying its reserves into European and higher-risk assets.
Apparently, Chinese exporters are also getting nervous about the impact
of a falling Dollar on their respective bottom lines. The RMB has risen
11% since the beginning of 2007, which means Chinese companies now
receive 11% less on sales to destinations abroad than they did for
equal-priced goods in 2007. As a result, some companies have taken to
quoting prices in Euros or to adjusting Dollar-denominated prices every
few months. Other companies are building assumptions of a more valuable
RMB into their profit models, and setting prices accordingly. The New
York Times reports:

“We are gradually increasing our emphasis on the domestic market until
we can forget about the export market, because the profit margins on
exports are so thin,” [said one exporter].

Read More: Some Chinese Exporters Prefer Euros to Dollars

Original post by Jimmy Atkinson and software by Elliott Back

While the credit crisis has ravaged the economies of the US and the UK, the EU has largely been spared. First quarter GDP grew at a healthy annualized rate of 2.8%, helped by a whopping 6% expansion in Germany. However, a number of economic indicators now suggest that all is not well on the European front. Business and consumer confidence indexes are trending downward. Manufacturing output is down. So are retail sales. Spain, which benefited the most during the credit boom, is now reaping the greatest losses during the crunch, and could put a drag on the entire Euro-zone. One prominent economist is predicting that the EU economy won’t expand at all in the second quarter.

Unfortunately, the only data point which is trending upwards is inflation. Even though the EU is much more efficient than the US in terms of its use of oil, record oil prices (as well as food prices) are taking their toll. As a result, the European Central Bank cannot (or will not) lower interest rates until price inflation returns to a more palatable level. Accordingly, EU member states are taking matters into their own hands by unveiling economic stimulus plans and tax cuts. As far as the Euro concerned, the ECB’s focus on price stability (at the expense of growth) is not hurting the common currency, although if the economy really tanks, the story could change depending on concurrent circumstances in the US. The Economist reports:

The ECB has a strict remit to keep inflation
in check, so rising commodity prices are likely to keep interest rates
high, lending further support to the euro.

Read More: The euro-area economy - Too good to last

Original post by Jimmy Atkinson and software by Elliott Back

The upcoming 10th Anniversary of the European Central Bank is being greeted with a flurry of commentary and analysis of its brief history. The consensus is that both the bank and the Euro currency over which it presides have come a long way. The respect that investors have come to accord the Euro with can be witnessed in its rapid appreciation over the last five years. The ECB has also been singled out for praise for its commitment to fighting inflation.

But the the fact that the overall Euro-zone economy is on solid footing masks some important disparities within.The economies of the so-called PIGS countries (Portugal, Italy, Greece, and Spain) for example, are faltering in the wake of the credit crisis, while their neighbor, Germany, notched strong quarterly growth of 1.5%. Some of the newest members of the EU are struggling, due in part to the Euro’s rise. This has led some commentators to return to the principal argument that initially opposed the Euro- that the economies of the Euro-zone were and continue to be too diverse, and that it does not make sense for them to be governed by a common monetary policy. Some of the original members, namely Italy, are openly disdainful of the perceived negative impact of the Euro on their respective economies. In fact, it is possible, though unlikely, that a protracted economic recession could lead some of them to abandon the Euro. The Times Online reports:

"The failure
of eurozone governments to implement the necessary reforms during the recent
good times may eventually sow the seeds of the break-up of the eurozone and
the demise of the euro. Nothing lasts forever."

Read More: Reform failures may still kill off the euro

Original post by Jimmy Atkinson and software by Elliott Back