Euro question

mirwillbeback

Hi all,

Just popped in to get some info from the experts on this forum

I am trying to understand the reason that the GBP and USD rates versus EURO are so generous right now. To my untrained mind, this would suggest the euro is in a strong position.

However, whenever you turn on a TV station, all the news seems to be doom and gloom about country's debts and future rates rises.

My question is if the current exchange rates reflect how bad the US / UK are, or is there more going on?

Thanks in advance if anyone can answer.

Paddy Orwell

currency rates are determined by monetary policy (i.e. interest rates and printing money aka quantitative easing) as well as economic fundamentals. The UK and US approach has been to have a stimulatory monetary policy (low interest rates and quantitative easing) which have the effect of cheapening the value of their currency vis-a-vis the euro.

FISMA

Ronald Reagan was partial to "king dollar." More recent Presidents have preferred a cheap dollar.

If you borrowed a lot of expensive dollars, wouldn't it make sense from the debtors perspective to pay back cheaper dollars in the future?

Also, a cheap dollar entices people to want to buy American goods and travel to the states.

Finally, I tend to think that all currencies in the world are scr€w€d up. However, given the inter-connectivity of the world, no-one is willing to point the finger.

What good would it do the world if, just say, the €uro folded?

Also, what if the Chinese publicy stated that they believe the states would default on their debt? If someone owes you money, the last thing you want to do is help push them towards bankruptcy.

You cannot correlate the health of an economy solely on exchange rates.

The punt almost always beat the dollar. One would hardly say that Ireland was in a stronger economic position than the states.

dermo88

The Euro rates look generous because it is a Deutschmark in all but name. The Deutschmark was always a "hard" stable safe haven currency during its existence from 1948-1999. Also, English and American interest rates are at historically low levels. This has lead to effectively nothing but sentiment supporting their exchange rates.

Predicting what happens next is impossible, but at present, I believe the present talk from the European Central Bank is a shadow play of sorts. At some stage, both Greece and Portugal will default, it is impossible for them to repay back their debt levels with shrinking economies, and there is no confidence from the markets outside or the citizens on the future. A climate of fear exists, and fear freezes markets, spending and investment.

"The Punt always beat the dollar" - no, definitely not on a purchasing power parity basis, except for a brief period in 1983/84 when it hit 1-1 when Lloyd Bentsen raised interest rates to an eyewatering 18% in order to strangle inflation. Otherwise in the 20 year period 1979-1999 where the Punt traded independently it was usually around the $1.45 mark.

This crisis has exposed paper currencies as vulnerable, and the aftershocks are often more painful than the initial quake in economic crises of this nature.