Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Thursday, December 04, 2003

Something is Very Wrong Somewhere

People keep writing to me and asking whether the unrepenting rise of the euro mightn't be a good thing after all. My response has been, and continues to be: not if you're living in Germany and sitting on a below 1% inflation rate it isn't. Vivek asked in the comments column why they don't lower the interest rate which might be thought of as the standard response. Well look at the US productivity numbers. These have to have something to do with leveraging outsourcing, and they still continue to come in higher than the GDP growth numbers which, on a simple rule of thumb notion, means they have to be disinflationary in their impact. So the US doesn't want deflation, so logically down the dollar must come (not to mention the trade deficit which it needs to close). This then is why the euro is effectively defenceless: because trying to halt the euro rise would inevitably mean a Dutch auction with the US authorities as the only other bidder.

The euro jumped to its highest level ever against the dollar on Wednesday as news that US productivity grew at its fastest rate for 20 years in the third quarter failed to stop the US cu rrency falling. The 9.4 per cent increase in productivity underlined the critical role of the US in driving the global economic recovery but also showed the market's pessimistic view of the dollar. One trader said: "It takes good news to hold the dollar steady, and bad news will just send it lower." The euro climbed to $1.2128 against the US currency, its fourth successive day at a record high. Economists warned that the euro's rise threatened to damage the competitiveness of Europ ean companies and could stifle the nascent export-led recovery in the eurozone. The European Central Bank, which meets today, is expected to keep interest rates on hold at their post-war low of 2.0 per cent.
Source: Financial Times

No comments: