It was June 2008 when I flew to New York to meet Paul Volcker for the first time. That trip is memorable for two reasons: first and foremost, of course, for the opportunity to sit down and talk with Volcker. But also because that week, EUR/USD reached its all-time high, just shy of 1.60.
Back then, shopping in New York was a joy for Europeans. EUR/USD is now hovering around 1.17 to 1.18, nearly 15 percent higher than at the start of the year. Is this the beginning of a move back toward 1.60? That seems unlikely—for several reasons.
Many point to US President Trump’s policies and the high and rising US national debt as the key reason, if not the reason, for the recent weakness of the dollar. That undoubtedly plays a role, as does the hope of some kind of economic renaissance in Germany and the broader eurozone, now that Berlin has abandoned the debt brake and is planning to spend hundreds of billions of euros in additional funds.
That last point, however, seems like odd reasoning to me. In many eurozone countries, national debt levels are just as high—or higher—than in the US. If the US debt burden is cause for concern, shouldn’t the same apply to those European countries? I call that argument a wash. What remains is the question of which economy underpins the dollar versus the euro.
The US economy is still stronger, more resilient, more flexible, and more innovative than that of the eurozone, and that is not likely to change anytime soon. It would take a great deal—not least of all time—to structurally weaken that foundation.
Additionally, the BIS (Bank for International Settlements) recently published an analysis showing that much of the dollar’s recent weakness is due to large Asian investors belatedly hedging their currency risk. That is an important finding, because it suggests the dollar’s weakness is not driven by structural factors.
And then there’s our own European Central Bank (ECB). You can set your watch to it: whenever EUR/USD starts to rise, the ECB begins complaining about the strong euro. Several members of the Governing Council have recently voiced concern about the strengthening euro. Their worry is that a strong euro will push inflation in the eurozone too far down. After all, a stronger euro makes imports cheaper in euro terms.
These concerns increase the likelihood that the ECB will use the euro’s strength as a reason to cut rates further this year. The takeaway: the ECB views a strong euro as a problem, but rarely loses sleep over a weak euro.
There is also a striking inconsistency here. Earlier this month, ECB President Christine Lagarde gave a speech—and penned op-eds in virtually every newspaper willing to publish them—arguing that the euro should play a bigger role on the global stage, especially now that the dollar is under pressure. The rest of the world, she said, should use the euro more frequently in trade and as a currency in which to hold reserves.
One key requirement for that to happen is that the rest of the world must have greater confidence in the euro. And trust in a currency typically grows when that currency is perceived as strong. After all, who wants to hold their savings or issue invoices in a currency that is steadily weakening?
Yet not long after Lagarde’s call, the ECB begins to grumble about the euro getting stronger. That sends a clear message to the rest of the world—and it will make other countries think twice about increasing their use of the euro in trade or reserves. Ironically, the ECB, which is eager to see the euro gain global stature, is undermining that goal through its own words and actions.
Moreover, if the rise in EUR/USD truly reflected a newfound enthusiasm for the euro, we should also have seen the euro strengthen against the Swiss franc. But if we look at that chart, it shows the franc has never been stronger against the euro than it is now—even despite the Swiss National Bank’s desperate efforts to make its own currency less attractive, for instance by cutting interest rates to zero percent.
A structurally strong and sound currency like the franc cannot simply be made unattractive—people know better than to fall for that. Likewise, you cannot make a weak currency appear solid and robust through cosmetic measures alone. Fundamental weaknesses cannot be disguised. Just ask the euro.
Edin Mujagić is an economist, manager of the Hoofbosch investment fund, and author of the book Turning point 1971. He writes a monthly ECB Watch column for Investment Officer on the monetary policy of the European Central Bank.