The euro has gained almost 17% since June and the exchange rate in now almost US$1.40…
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Yes, the fed is clearly going down the route of further balance sheet expansion given much a weaker than expected recovery in employment and inflation. At the same time, liquidity is actually being withdrawn in Europe. Part of getting inflation higher in the US will come through a weaker currency. We can see 1.50 before year end.
How much of this increase in the value of the euro is down to technical and speculation factors and how much is down to fundamental factors?
We believe currencies are driven by a combination of factors. The fundamental factors I mention above are now being supported by chart analysis and sentiment analysis. Remember that the market as a whole thought the euro was on the verge of a spiralling into the abyss just 2-3 months ago. Additionally, asian central banks are aggressively intervening. The dollars they are purchasing will be recycled, in part at least into buying Euros.
What effect does the increase in the euro have in macroeconomic terms? Will such a strong exchange rate destabilise the Euro zone?
A stronger euro obviously has a deflationary impact. For countries on the periphery with the most severe of fiscal positions and fiscal programs this is the last thing they need. But one should bare in mind that some if not all of this effect could be offset if the improved tone to Europe as a whole initially caps and then reverses the elevated level of bond yields.
What tools and how much appetite do the main central banks (Fed, ECB, BoJ, BoE, Switzerland and China) have for investment in currencies?
Central banks direct ” investment “ in currencies comes through the build up of fx reserves. Across Asia in particular there has been a sharp increase in recent months, initially into USDs and then diversified from there. Euro as the big liquid market attracts most of that flow although at the margin there is increasing interest to build commodity type currency exposure.
Five major areas: Japan, the Euro zone, the US, China and the UK: How much weight does each of these have on the exports of the others? It seems they all have an interest in devaluing their currencies. Which one is best prepared to win this battle?
I don’t have the export data to hand. All I will say is that the US stands at the forefront of willingness to print more money and drive their currency lower. The UK may be close behind. Europe is very unlikely to join the money printers.
Source: ETFWorld – Schroders