Appreciation of euro to continue

Original drawings by Albert Rocarols on the theme of the euro. (EC Audiovisual Services)

This January’s upwards trend of the euro parity with the other major currencies, the dollar and the yen, led today at a quote very close to the upper benchmark of 1.35, triggering worries about Eurozone’s exports. During this first month of the year the single European currency has appreciated at least 15% with the dollar and 25% with the yen, making the life of exporters more difficult.

The problem is however that the rally of the common currency creates a lot more problems for the countries already in trouble. It is well established that German exports are not so much price sensitive as the products sold abroad by countries like Spain, Italy, Greece, Ireland and Portugal. In this last category one could also place France, being already in dire straits with its international competitiveness and trade account deficits. Let’s follow the facts.

Upward tendency

On 11 July 2008, on the apogee of the American credit crunch the euro/dollar parity reached its apex, with an unbelievable quote of 1.594. Two years later on 6 June 2010 at the heart of the Greek tragedy, the exchange rate of the two monies came to its low at 119.3 American cents. This downward tendency didn’t last long. Ten months later the euro appreciated again with the dollar at 1.482 on 30 April 2011.

This development materialised despite the still raging crisis over a possible Greek exit from Eurozone.  After that the euro parity followed a mild downward path until July 2012. However since the major Eurozone countries left to be understood during the summer of 2012, that they will not to let Greece rot alone, the euro commenced its current upward path. The tendency culminated this January, after the Japanese plan for a much cheaper yen became apparent.

In short the euro exchange rates in money markets are behaving as if investors are constantly on the look for reasons to massively choose euro denominated placements. This is a strong indication that the single European money is following the old paths of the Deutsche Mark, which was constantly on the rise with the dollar.

At this point it must be noted that the current appreciation path of the euro is not based on a growth prospect. On the contrary Eurozone was in recession during the last quarter of 2012, without any tangible possibilities for a new growth period this year. What if Eurozone returns to even a fragile resumption of economic activities? In this case what will be ceiling of the euro/dollar and the euro/yen parities?

There is no doubt then that the present conjuncture in money markets is not so much supported by presumably good prospects for the European economy, but rather it can be explained by the rather negative prospects of the American and the Japanese economies.

In the US, the Obama administration is constantly asking the Congress for new higher government borrowing ceilings. However the ever-increasing US sovereign debt, with which Washington finances its extra spending, do poses mounting problems menacing the creditworthiness of the US. At the same time though this extra government spending doesn’t seem enough to bring the economy in a virtuous cycle of self-sustainable growth path.

As for Japan its long time stagnation record can logically be reversed to a mild growth, only at the expenses of its trading partners. The yen devaluation spearheads this policy option.

Summing up this little theory, the natural conclusion is that the external value of the euro will very likely continue to appreciate. Past records are a good guide for prospects.