The Reasons For The Euro’s Decline

For currency traders, expecting the U.S. dollar to be a long-term winner has generally been sound advice. That has borne out recently in spite (or because) of global tumult, according to the DXY index. Whether this is due to the tendency of U.S. treasuries to be treated as a safe haven, high spending on the part of the government, or any of a number of other reasons, the simple fact of the dollar’s strength remains. On the other hand, anyone paying attention will have noticed that the euro has not fared so well in what should have been more or less a similar period of recovery in the last year.

In fact, the latest forex charts at FXCM as of this writing show the euro very close to its lowest against the dollar since the fall/autumn of 2020. It could be tempting to chalk this up to the fact that there is an ongoing land war in Europe, of course, but the truth of the matter is that the euro’s decline began further back, following a peak versus the dollar at the beginning of 2021. Clearly then, other factors need to be accounted for in the euro’s struggles of late.

Deglobalization

As with so many socio-economic trends, like the decline and transformation of the high street or moves toward working from home, the pandemic was an accelerant to the emerging trend of deglobalization. The disruption to global supply chains was a wake-up call for governments around the globe, encouraging many to reconsider which industries can or should be brought into the domestic sphere.

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Ideological anti-globalization is a global phenomenon, but in Europe a more fragile order has for years seen economic integration chipped away even within the bloc. With the UK having left the EU and mainstream parties in places like Poland and Hungary hoping to do the same, fragmentation was already advancing. None of those three countries are in the Eurozone, but we’ve seen that the changing relationship between the EU and the City of London alone has damaged the credibility of the euro as a dollar alternative.

Dollar Dominance

Comparison of the euro against the dollar is an important metric, but some would argue an unfair one. Even though the U.S. has had a falling share of global GDP since the 1970s, the dollar has held on as the default choice for forex reserves and transactions. Recent figures from the International Monetary Fund show that use of the dollar for all kinds of international transactions has continued to far outstrip what might be expected based on the U.S. share of global trade, international bond issuance, and borrowing across borders.

The euro has not always clearly trended down against the dollar since its creation in the 1990s. Rather, the inflection point for the downward macro trend for the euro (and many other currencies), when viewed against the dollar, was the financial crisis of 2008. This may point in part to differences in monetary policy, since the Eurozone’s share of global real GDP has steadily risen for decades –– although it should be noted that for the real GDP of Eurozone majors Germany and France, the pandemic has been extremely volatile with a major market correction after April of 2021.

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Monetary Policy and Crisis

Generally favoring a conservative approach, the European Central Bank has not intervened in foreign exchange since its effort to shore up the Japanese Yen following the Fukushima disaster in 2011. Putin’s strategy of shoring up the Russian ruble by raising interest rates may eventually tempt the ECP to get involved, but it’s believed that the euro would have to be in much worse shape for that. For the time being, the ECB remains in a “monitoring” stance, since devaluation’s impact on import prices doesn’t pass through to consumer prices as much as one might think.

Forex is a wild ride at the best of times, and despite common phrases about being in the same boat during the pandemic, the world is clearly anything but. The effects of a weakened euro appear to be showing up in exchanges like the German DAX and consumer price index, meaning something will have to change if Europeans are to avoid even more economic hardship moving forward.

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About the Author: Osmond Blake

"Web geek. Wannabe thinker. Reader. Freelance travel evangelist. Pop culture aficionado. Certified music scholar."

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