The magnificent euro is holding up remarkably well (for now)

The Fed is compounding the shock by draining global dollar liquidity at a net annual pace of $2 trillion, that is to say by switching almost overnight from $120bn a month of QE asset purchases to near mirror-image asset sales (QT).

Ferocious tightening by the world’s superpower central bank has turbo-charged a parallel development: America’s astonishing revival as the top global producer of oil and gas, a valuable thing to be in an energy crisis of broader scope even than the 1970s.

This has pushed the dollar index to levels not far shy of the Reagan dollar in the mid-1980s, when it was sterling’s turn to flirt with parity. (Britain was spared that indignity by the timely intervention of the Sultan of Brunei, responding to a plea from Margaret Thatcher).

Yet still some chatter about the end of dollar hegemony. Dream on, my friends.

What is true is that the euro is not as strong as it might be given that the ECB is finally about to abandon its invidious experiment with negative interest rates, which has been the nail in the coffin for Germany’s once vibrant cooperative and savings banks, the backbone of the Mittelstand family firms. A 50-point rate is expected this summer.

Markets do not fully believe that the ECB is capable of seeing through its plan for a series of staccato rate rises, or that it has the stomach to end bond purchases once and for all, given that QE has long since metamorphosed into a debt shield from insolvent sovereign states.

They doubt whether the ECB can devise a credible and legal ‘anti-fragmentation’ tool to prevent Italian and Club Med risk spreads from spiraling out of control once there is no longer a buyer-of-last resort for their ever-higher debts.

These doubts have crept into the currency, but bear in mind that the Japanese yen is even weaker. So is the Swedish crown.


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