In the past several hours, the euro has surged following the release of comments from German Chancellor Angela Merkel, who has said that the single currency is “too weak” for Germany – weakness which is “due to the ECB’s policy” and which “makes German goods…comparatively cheap.”
As of writing at 13:35 GMT, the euro is buying $1.1245 and remains close to its intra-day high (and new six-month high) at $1.1249. Four-hours ago the euro bought only $1.1160-65. These levels represent a substantial discount on euro valuations from recent years, such as in 2008, when EUR/USD traded above 1.6; in 2011, when it approached 1.5; and in 2014, when it traded almost to 1.4.
Merkel’s comments have reversed a minor fall in the euro which occurred in Monday’s Asian session and EUR/USD now stands up 0.3% on Friday’s close.
The euro is resurgent following Emmanuel Macron’s victory in this month’s French presidential election. The currency has gained almost 5% since April 21st against the dollar – that date being the first trading day after the election’s first round of voting, in which Macron pulled in a higher percentage of the vote than the market’s least favourite presidential candidate, Marine Le Pen.
Unless some mini-catastrophe takes place between now and the close of today’s New York session, the euro will also have gained in six of its past seven trading days against the US dollar, British pound and Australian dollar.
Senior US Trade Advisor: The Euro Is “Grossly Undervalued”
Much has been said this year by the political elite about the problematic valuation of the euro.
In late-January, a senior US trade advisor, Peter Navarro, caused a stir in euro and dollar exchange rates when he told the Financial Times that the euro was “grossly undervalued” and seemed to suggest that Europe had managed the currency in such a way as to gain a trade advantage over the US.
At a time when the new Trump administration were busy criticizing the “too strong” level of the dollar, Navarro’s comments worked to drive EUR/USD sharply higher and assisted the Dollar Index (DXY) in recording its worst January performance in 30 years.
But It’s Nothing New…
“It’s nothing new and Merkel is stressing the obvious,” Manuel Oliveri told Bloomberg reporters this afternoon.
Oliveri, a market strategist at Crédit Agricole, added: “Merkel’s comments are unlikely to lead to any sustainable market movement.”
Indeed, the comments aren’t new. In February, we already heard from German Finance Minister Wolfgang Schaeuble who, like Merkel, appeared to agree with America’s criticism of the euro-to-dollar exchange rate. As if to say: “Don’t blame Germany, blame the ECB,” Schaeuble said:
“Monetary policy is too loose for Germany. The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position. I don’t want to be criticized for the consequences of this policy. When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus.”
Given what’s been said, it beggars the obvious question: why does the ECB not tighten monetary policy and thereby drive the euro away from historically cheap levels?
The answer to this is simple. Because the ECB makes policy decisions for Europe as a whole, not for any individual state. And by necessity, the ECB has had to engineer monetary policy in a way that has supported the eurozone’s weaker states, like Greece and Portugal, not Germany.
What’s Next for the Euro?
Even if Crédit Agricole’s Manuel Oliveri is correct and Merkel’s comments aren’t likely to fan the flames of euro optimism for long, the euro rally may be sustained anyway.
Consider that in 2017 investors are finally expecting tapering of the ECB’s quantitative easing (QE) program – an unconventional program used by central banks in combination with low interest rates to keep monetary conditions especially loose and which necessarily weakens the national currency substantially. Any scaling back of QE in Europe this year should bolster the euro.
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