Euro and its Effects in the Global Economy

The consensus of analysts that an appreciation of 10% in the euro exchange rate is causing a decline of one percentage point growth in the euro zone during the last two years, with a special emphasis in the second period. ‘Maintaining a high euro reduces Europe’s ability to generate wealth, and that makes it a less competitive area, explains a specialists of the euro economy. But in reality, this impact is not as easy to define, since it involves many nuances. For example: a strong currency attracts foreign investments in all asset classes. Another, the oil that is traded in dollars, has risen 95% in a year and a half, but the cost measured in euros has increased by 33%.

To what extent is damaging the appreciation against the dollar?

Very important, but not as much as it used to be in the past. The USA is no longer the largest trading partner on the bloc. The United Kingdom accounts for 16% of the exports of the euro area, while the U.S. equivalent to 14% and the rest is divided among various partners. ‘The most relevant to the regional economy is not crossing against the dollar, but the effective exchange rate, against major trading partners,’ says Anton Brender, Chief Economist at Dexia Asset Management. ‘An ideal combination would be a slight appreciation against the dollar, which would reduce the oil bill, and depreciation against other currencies, “suggests Brender. But, of course, that perfect combination is something that currently is not happening.

What factor is determining the rise in the euro?

In the short term, the driving force behind the appreciation is the expectation on the future evolution of interest rates. Proof of this is that the currency has appreciated only against the dollar. In the past month and a half, the euro has gained over 9% against the Japanese yen and more than 3% against the Swiss franc and sterling.

How far can the rise of the currency?

Citigroup predicts a change of between 1.43 and $ 1.44 per unit in the medium term. Merrill Lynch provides a stable crossing for the coming months, but acknowledges there is more risk that a persistent appreciation of the opposite. For technical analysis, Inverters A & G gives room for community currency to reach $ 1.45. Only statements of the ECB last week, easing the expectations on the rising price of money, helped moderate the path appreciated euro. However, it should be clear that to succeed in the career of a currency is unlikely. ‘The evolution is dominated by financial flows, as determined by the decisions of investors, in turn guided by their expectations about the interest rate’, describes Jose Carlos Diez, chief economist for Intermoney. Being specific about a currency prediction can be extremely difficult, it’s a lot more rational to try and predict a target area than specific price.