Euro falls below parity with the dollar

https://www.reuters.com/markets/us/dollar-hits-5-week-high-hawkish-fed-before-jackson-hole-2022-08-22/

by mantiq • 4 years ago

176 276 4 years ago

viraptor3• 4 years ago

The title of this makes me annoyed. What parity? They're both abstract made up units that happened to be even on a random scale for a while. This is financial numerology :-(

(yes, I know there's more content and "this week's currency summary" sounds less fun and I should chill out)

nopehnnope3• 4 years ago

Parity can just mean equal. And the Euro’s creators clearly targeted a value similar to the dollar.

wirrbel• 4 years ago

Fairly certain that Germany pushed for the value with an easy conversion (2 Deutsche Mark = 1 EUR) and not for dollar-similarity.

Exchange rate was 1 EUR for 1,95583 DM

viraptor3• 4 years ago

Well, this led me to learn something from my stupid comment. Originally the EUA (https://en.wikipedia.org/wiki/European_Unit_of_Account - euro's grandparent) started at 1:1 with USD. (and quickly diverged) TIL

EUA was exchanged 1:1 for ECU, then 1:1 for EUR, so that's a nice continuation.

smcl2• 4 years ago

I suppose "Euro falls to historic low against dollar" might have sufficed as a headline, but highlighting the relative values and the 1:1 threshold that was crossed (no matter how abstract it technically is) could help more readers connect with the story a bit more

detaro• 4 years ago

Doesn't "historic low" mean "lowest it ever was in history"? That's not the case (yet).

martopix2• 4 years ago

It's just a psychological threshold, but because I don't follow currency markets that closely, it makes it very evident to me that the euro has fallen below a threshold, against the dollar, that it never had gone down to.

awrence• 4 years ago

EUR vs Dollar went as low as 0.82 ish in its early days (00) and was below 1 through roughly 02 so not a first no.

pavlov• 4 years ago

Early in its life EUR was below 1 USD for a few years, Jan 2000 - Oct 2002.

KingOfCoders8• 4 years ago

Never, except when it had.

missedthecue• 4 years ago

If newspapers weren't allowed to report on abstract concepts I don't think we'd ever get any financial news. What is a dollar or a stock or bond or legal contract anyway?

shakow• 4 years ago

What parity?

Parity in this context just mean a ratio of 1-to-1, doesn't it? I guess it could be synonymously replaced with ‶numeric equality″.

caf• 4 years ago

Might as well get annoyed at people for celebrating anniversaries. It turns out that noting arbitrary patterns in numbers is just a common way to observe changes in continuously-measured values.

mmmpop• 4 years ago

We're out here. Don't you dare tell me "happy birthday".

Workaccount2• 4 years ago

Given that they are both traded, they're really "abstract made up units" at least no more than than anything else you buy is. There is an enormous market consensus that determines the value of dollars and euros.

The key takeaway given that is that the market is either losing confidence in the eurozone, gaining confidence in the US, or most likely; both.

viraptor3• 4 years ago

Correct, every other traded value has the same meaningless in reality, but psychologically cute thresholds. Same as articles about some stock price crossing a (round number).

The key takeaway...

Yes, and that's the useful information.

randomdata2• 4 years ago

They're both abstract made up units that happened to be even on a random scale

They are salable assets with a price that people are willing to pay to acquire them. It is no more abstract than a hypothetical report on how a house in New York City is now worth less than a house in Wichita. Numerology implies some kind of mystical force. This is simply observation of measured human behaviour.

dmurray• 4 years ago

Not really, because we have a sense of how big a house should be. With outliers, it's a building large enough to house a single household. Houses in a given area will be within one order of magnitude in their prices.

It's more like saying "a building in New York is now worth less than a business headquartered in Wichita".

_hcuq• 4 years ago

Like your salary?

debacle• 4 years ago

Just for fun, I took a look at GBP/USD and it looks like that is tanking as well.

Meanwhile the ruble is stronger than it's been in 4 years.

For people in the EU/UK, how has this currency slide impacted your day to day?

nothis• 4 years ago

For people in the EU/UK, how has this currency slide impacted your day to day?

Not at all?

I mean, I guess you could argue which caused which but the real problem here in central Europe are gas and energy prices. Those legitimately doubled and affect personal budgets.

sph• 4 years ago

Would you be prepared to say that the 18% inflation [1] isn't completely due to GBP getting weaker than USD? Not being facetious, actually asking the question.

Because I'm sure all the US-based services will soon be updating their prices to match our rapidly weakening currency.

1: https://www.theguardian.com/business/live/2022/aug/22/cinewo...

asldjajlfkj3• 4 years ago

Day to day? Not at all. Everything is denoted in EUR anyway and imports are hedged.

Oil and gas are expensive, but the strong dollar isn’t the main factor.

devoutsalsa• 4 years ago

The ruble isn't strong. You can't sell meaningfully sell it on the open market. When you buy it, the price goes up. When you can't sell it, the price stays up.

https://www.cbsnews.com/news/russia-ukraine-ruble-currency-r...

waffleiron2• 4 years ago

When you buy it, the price goes up. When you can't sell it, the price stays up.

How could you buy it, if it can't be sold? Also that article is from June, a lot has changed since then.

mellavora• 4 years ago

Two responses saying "oil and gas are more expensive, but that is other causes"... forgetting that oil and gas are priced in dollars. So the exchange rate is certainly a cause (i.e. 20-30% of recent moves), though agree not the main cause (recent moves are > 100%, mostly due to Russia tightening the pipe).

asldjajlfkj3• 4 years ago

For totally fungible assets (e.g. stocks) that’s true. Not so much for gas, where it is sold and bought with a regional restriction. Exchange rates are transparent to the market situation.

legulere• 4 years ago

The ruble is so strong because russia cannot spend money anymore because of sanctions.

I'm living in Germany, the biggest problem is the inflation caused by energy prices. It's still lower than in the US or the UK, but people are starting to struggle. Business is going well as Germany is mostly export-driven, but companies don't want to give out rises.

adammarples• 4 years ago

The rouble is strong because the Russian state is burning through its foreign reserves to backstop it.

tantaman2• 4 years ago

I think it's that Russia is pegging the Ruble to a fixed value of gold and requiring all nations importing from Russia to use Rubles to buy their Russian exports.

The only way to get Rubles to buy your imports is to give Russia gold at the rub-gold exchange rate set by Russia.

This peg, iiuc, is one-way. As in, Russia gives you X rubles for Y gold. You can't, however, redeem your rubles the other way around.

So... is the Ruble really strong? idk.. it all sounds very artificial given exchange is only in one direction.

alecco2• 4 years ago

Rents and general cost of living keeps rising.

GordonS• 4 years ago

Also seems like there are more strikes or strike ballots happening every week.

iSnow2• 4 years ago

Didn't impact me at all. Inflation does but since I earn above-average, not to a painful degree.

I don't have plans to go on holiday to the USA in the next year or so, don't plan to buy a Tesla, maybe a new Mac which is going to go up in EUR.

I worry about the long-term effects the war will have for us. Europe is resource poor and constantly rising energy prices will hit our industry hard as we cannot easily find domestic sources of energy. I do hope that switching to renewables gets accelerated and will provide us with both cheap energy and new opportunities for industry.

MomoXenosaga2• 4 years ago

Europe is not resource poor. It was just easier to let Russia and China deal with the environmental costs. Literally nobody gives a shit if a pipeline in Syberia starts leaking.

imustbeevil• 4 years ago

Another interesting thing is that many countries are experiencing lower inflation than the US, but their currency is getting weaker, so the USD's purchasing power is increasing two-fold. I've been planning a trip to Malaysia because while their exchange rate against the dollar has fallen, they've only experienced ~3% inflation, so not only are all of their products 22% as expensive, they also haven't meaningfully changed in price since 3 years ago (from the dollar perspective), whereas the dollar's purchasing power in the US is basically down 25%.

JumpCrisscross5• 4 years ago

been planning a trip to Malaysia because while their exchange rate against the dollar has fallen, they've only experienced ~3% inflation, so not only are all of their products 22% as expensive, they also haven't meaningfully changed in price since 3 years ago

You’re running a real-goods arbitrage analysis. It’s dicey to compare national inflation statistics for this purpose. They’re measuring separate baskets of goods on different methodologies.

This means you must reconstruct the baskets. As such, you might as well measure the things you’re buying. For traded goods, e.g. grain and fuel, there is unlikely a massive pre-tax spread because professionals are looking at the same data. For non-tradable goods, e.g. hotels and restaurant meals, you might see a yawning gap.

gls2ro• 4 years ago

I assume this should be good for EU economy on the long run?

Like exports from EU to US are now more profitable.

Or am I missing something? Can someone with more understanding/background explain how this might effect production and exports?

epgui• 4 years ago

Yes, it is indeed good in that it makes European exports more competitive, but on the flip side, imports are more expensive, which can mean inflation and/or increased sensitivity to supply chain disturbances. I’m sure it causes some other problems as well.

(not my area of expertise)

thehappypm4• 4 years ago

I imagine it would be better for an economy that does huge amounts of exporting compared to importing (like China). Europe does a ton of importing so that side of it sucks.

fzfaa4• 4 years ago

This is good for the European countries that export things, and bad for those who don't.

blub3• 4 years ago

Germany already managed to exhaust all its export surplus on buying gas.

spywaregorilla5• 4 years ago

This is a symptom of a much broader story of europe becoming weaker and the euro becoming less valuable. This particular thing affects export prices positively, but its on the backdrop of a bad trend.

alecco2• 4 years ago

A drop of 10% of currency is not enough to offset the other components. Costs for manufacturing are rising fast. PPI (cost of producing) is rising by 20 to 50% in several key EU countries. Lead by energy but also by commodities.

f6v2• 4 years ago

I assume this should be good for EU economy on the long run?

If they could produce and export a lot of stuff. But that requires energy. At the current energy prices- forget it.

petesergeant• 4 years ago

depends on how much the raw materials cost if they're coming from outside the EU, or if other people are competing on price for the raw materials

paganel2• 4 years ago

I'd wager most of the raw the materials come from outside of the EU, and there is indeed intense competition for them from outside economic entities (US, China etc). I mean, even if one were to "discover" a huge Lithium deposit in the Harz mountains (let's say), there's no way that is going to get mined. That actually happened in Serbia, not an EU country, and even there they couldn't open a Lithium mine.

In other words Europe depended on its (relatively) strong currency in order to sustain most of its remaining industry, if that currency strength is gone then things will become real bleak.

Or maybe the financialization of the remaining pieces of industry will save us all, even though I have very high doubts about it. In one of their recent issues The Economist was un-ironically suggesting that the people now producing actual fertilisers in Germany should switch careers and become "fertilisers consultants" or some such, seeing as the production process itself will have become too onerous.

Crazy times, wish we had more "experts" with their feet definitely on the ground compared to what it seems we have (or rather we haven't) right now, after all, parts of Europe have been through all this before (I'm from Eastern Europe, I should know), there should be some institutional knowledge about this type of processes.

mg• 4 years ago

Every article about the EUR/USD ratio talks about gas prices.

But the current rise of the Dollar started 15 years ago.

Over these 15 years, it has become more and more apparent, that software is eating the world. And the US keeps extending their lead in this area.

I would not be surprised if that contributes to a long term trend in the EUR/USD ratio.

(I'm sitting in a cafe in Germany, writing this text on laptop made by a US company, running an operating system maintained in the USA, into a browser made in the USA and posting it to a website of a US company.)

ladyanita22• 4 years ago

I'd bet it has much more to go with the US shale oil industry.

In Europe you can't do fracking

cloutchaser3• 4 years ago

Its both really.

In Europe you can’t do innovation, or it’s an order of magnitude more expensive.

maeln• 4 years ago

The trading cost of a currency is hardly impacted by one industry outperforming. Financial policies have a much stronger impact when it comes to currencies. Right now, the U.S and the E.U (and its member) are not handling the current rise in inflation the same way, after also not handling the COVID relief efforts in the same way. Just look at the graph[1] the fall of the EUR as started since January 2021.

[1] https://www.xe.com/currencycharts/?from=USD&to=EUR&view=5Y

password1• 4 years ago

Please burst your bubble and consider that there is WAY more going on in the world than tech and software. The idea that you can point at something as complex as monetary economics and say "I know what's happening and I can trace it back to 15 years" is absurd and over-simplistic.

YetAnotherNick• 4 years ago

No big sector has seen similar level of YoY growth like tech. STOXX 600 is almost flat for last 20 years. While S and P 500 and Nasdaq rose 5-10 times over that period. While tech is not everything for the economy, it seems tech is everything for economy growth in past 30 or so years.

3minus1• 4 years ago

making a blanket dismissal and providing no actual argument or data doesn't exactly help

margalabargala• 4 years ago

There is not, and never has been, anything going on in the world of monetary economics other than tech. Going back thousands of years.

"Tech" is a force multiplier, whether that tech is factories, steam engines, gunpowder, chariots, printing presses, or software. The people who have the best mastery of the currently-most-useful force-multiplier tech at a given time tend to do very well.

Software, broadly, just currently happens to be the most useful force multiplier. That may change to the subset of software that is ML, or it may change to robotics, or something else entirely like synthetic bio.

dang• 4 years ago

Please edit swipes out of your comments here. They degrade discussion and you can make your substantive points without them.

https://news.ycombinator.com/newsguidelines.html

CaptArmchair• 4 years ago

No. It's a reflection of how financial markets value regional economies that use / back those currencies.

Over the past 15 years, Europe experienced:

* The Great Recession. * A Sovereign Debt Crisis which lasted well into 2014. * Increasing competition from new economies in Asia, mainly China. * Brexit. * The Pandemic. * And now an unprecedented energy crisis.

Also, the EU had expanded swiftly in the '00s allowing many of the former Eastern Bloc countries to join the union. Arguably, one does not simply integrate national economies in a single market zone under a single currency. It takes years to align towards common policies, while dealing with the many challenges posed by cultural and political differences.

Let's not forget that the initial raison d'etre of the EU - such as it was conceived by Schumann and Churchill - was to ensure sustained stability and peace across the continent in the wake of World War II. In a way, the EU has been instrumental in protecting the continent from worse consequences given the turbulent waters the bloc has navigated over the past 15 years. But it hasn't come out of all of that unscathed.

In order for the EU to recover, it needs to invest in infrastructure and people. A massive challenge which is encumbered by the significant debts most European nations have been shouldering thus far.

You, on the other hand, using American technology to connect with the world and assert that "software is eating it", well, that's - historically - just one expression of American hegemonic power after World War II. In regard to the EU that's expressed military - through NATO - and economically through countless trade agreements which have led to tight integration (see: https://policy.trade.ec.europa.eu/eu-trade-relationships-cou...). Proliferation of US technology across the continent is just one expression of that relationship between the EU bloc and the US.

unpopularopp• 4 years ago

German economy, among the most exposed to disruptions in Russian gas supply, is "likely" to suffer a recession over the winter if the energy crisis continues to deepen

At this point I feel the EU is pretty much done and the war just showed how weak the EU leadership is along how individual member nations acting sometimes totally against each other (see France doubling down on nuclear while Germany does the opposite). Like I don't see any positive outcome for the Union no matter what happens in the war, unless you see the US having an even greater influence over Europe as a positive thing. Personally I'm extremely pessimistic.

JumpCrisscross5• 4 years ago

I don't see any positive outcome for the Union no matter what happens in the war

If you put zero value on European unity, and the security and economic benefits that brings, of course you aren’t going to value the EU. If Texans didn’t care when New York was attacked, it would be reasonable to ask why the U.S. is a thing. For what it’s worth, France building nukes while Germany snubs them is analogous to e.g. Kentucky burning coal while California puts down solar.

KingOfCoders8• 4 years ago

Let the Russians bomb and invade Washington State and we'll see how the dollar does.

emaginniss2• 4 years ago

I think if the Russians bombed Washington State, the rest of the US would actually help defend it by attacking Russia. While the military help that the EU is giving Ukraine is great, it is far below the level that the other states would provide Washington. I know that isn't exactly your point, but you can't say that Ukraine is as intrinsic to the EU as Washington State is to the rest of the US.

f6v2• 4 years ago

Ukraine is not in EU and shouldn’t be there.

tacitusarc• 4 years ago

That’s an interesting question. It would realistically escalate to nuclear war. But I’d we set that aside, it’s not immediately obvious to me how the dollar would do. It might actually strengthen.

causi3• 4 years ago

It's more like the Russians bombing and invading, say, Cuba.

s1artibartfast5• 4 years ago

A better analogy is if China invaded Mongolia and the US decided to cut trade.

Ukraine is not part of the EU and the EU decided to take a moral position and live with the financial consequences that go with it.

thiago_fm• 4 years ago

This is great for German exports. Expect to see more Mercedes Benz in the streets of America.

It generates some inflation as imports are pegged to the dollar(somebody mentioned that it is hedged, it is just by some extent), but overall is actually good for the economic block. The EU needs to export to survive.

The EU has been fighting a possible deflation for most of the 2010s, this is actually not so negative as people might think.

If ECB would raise interest to the same rate as the FED, Euro would become too strong. Inflation is already decreasing in Germany even with that 0% interest rate.

The main inflation concern is the gas prices for this winter and this isn't fixable with monetary policy. If we have no gas, no amount of money will be able to buy it.

01100011• 4 years ago

This thesis only holds if MB can afford to keep running its factories. Modern economies cease to function without energy, or when the price of that energy is sufficiently high.

simonh6• 4 years ago

This is great for German exports. Expect to see more Mercedes Benz in the streets of America.

A lot of MB sold in the UK are made in Mexico.

OJFord• 4 years ago

Import/export is really about money flow though, it's not (directly) that important where the goods are made or end up.

mutatio2• 4 years ago

Could you link a source regarding inflation decreasing in Germany? Only days ago German central bank chief Joachim Nagel said it will soon breach 10%.

Ancalagon• 4 years ago

Not to mention US tourism to Europe will increase I bet.

lostmsu3• 4 years ago

IMHO, it will still be a while until it grows back to pre-COVID levels.

im3w1l• 4 years ago

Currency devaluation is basically demanding that workers do more for less. That's great for companies, if those workers accept it and don't jump ship. However some of the brightest Germans I know are in the process of emigrating. They are tired of lockdowns and inflation and everything.

ithkuil2• 4 years ago

Emigrate, but where? I hear discontent from people from several countries but it's not clear there is any place to go where it is universally "better". Some places are better for some aspects, some places are better for other aspects; but like a short blanket, you pull one end and it uncovers the other end.

nine_zeros5• 4 years ago

EU is lucky they invested in rail lines and trains. The average person can at least attempt to stop using gas guzzlers and keep living their life.

If the USD falls and oil prices rise, we in America are screwed. We almost had it handed to us this summer.

BenjiWiebe• 4 years ago

Would it really be that bad?

Now I work very close to home, but when I didn't, I'd meet people commuting the other way. If it was no longer profitable to commute, we could either move to be closer to our job or switch jobs to be closer to home.

nine_zeros5• 4 years ago

Would it really be that bad?

Are you asking about America? This summer, my wife's friend ($70k/yr) was considering a tradeoff between eating healthy vs supporting her mom's rent.

Going closer to work is not a choice for many as rents closer to work are prohibitively high. Further, a lot of driving is errands and healthcare. I can't even get something to eat without driving 5 mins.

causi3• 4 years ago

Would it really be that bad?

Sure, for the fools who saw a couple years of two-dollar gas and decided they needed an F-350 to drive to their office job. It's hard to work up any sympathy for them, especially when most of them lived through the gas prices of the Bush years.

brundolf2• 4 years ago

The problem they're having is with natural gas, which they need for winter heating

KingOfCoders8• 4 years ago

I gladly don't need natural gas for winter heating.

Jochim2• 4 years ago

Petroleum prices also spiked, probably related to the war in Ukraine but I'm not 100% sure.

trgn• 4 years ago

It's the difference between heating your house to 72 and walking around barefoot, or 68 and wearing a sweater and wearing loafers.

Those are the tradeoffs. Need for indoor heating has a lot of stretch. In Europe, there's a ton of stretch on personal mobility too, since there are viable alternatives for the car.

Europe can weather this crunch a lot better than America.

lm284693• 4 years ago

It's mostly exaggerated. Some of my friends are already complaining because they won't be able to keep their flat at 25c in winter...

I haven't used heating in 5 years in Berlin, at the coldest it was 17c in my flat, having grown in the mountain that's my comfy zone

People want to live like kings for 50 euros a month, reality is catching up

TechBro86153• 4 years ago

If USD falls against what? Exchange is only meaningful with a counterparty.

nine_zeros5• 4 years ago

USD falls against oil price.

mantas4• 4 years ago

Trains run on electricity and electricity price is skyrocketing... And then some trains run on diesel...

That's before looking at how much of that €€€ was thrown at long-distance trains. While commuting was an afterthought.

yuan43• 4 years ago

The headline is "Gas crisis sends euro back below parity against dollar."

Yet the article does not explain how a "gas crisis" leads to a weaker currency.

What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices:

https://www.reuters.com/world/europe/german-economic-outlook...

And the ECB has done basically nothing about it. Deeply negative real rates and little indication that the ECB has the stomach for any substantive action.

On the US side, there have been sizable interest rate hikes, which will continue at least until the midterm elections get underway. Real rates are still deeply negative.

That difference in rates attracts a lot of capital that might otherwise be parked on the EU side.

The US doesn't need to be a pillar of financial responsibility to attract the world's capital. It just has to be the cleanest dirty shirt in the hamper.

jmnicolas2• 4 years ago

If the ECB raises interest rates most European nations wouldn't be able to pay their debts. It's an untenable situation, something will have to give.

candiodari2• 4 years ago

But it's nowhere near the braking point, in fact it isn't nearly as bad as the PBOC or, arguably, the BOJ and the FED (per person EU debt is still less than the US), so they definitely still have the option to kick the can down the road.

Ergo, you can safely bet both your kidneys that nothing's going to happen.

It's crazy how hard it is to make 1 European country agree on finances these days, all the EU member nations agreeing to seriously tighten is about as likely as the President of the US declaring he is an alien.

ParksNet• 4 years ago

What will have to give is the welfare state. Difficult to see how a retirement age in the early 60's is sustainable given this level of inflation. Better to abandon pensions entirely and just offer disability stipends for those who cannot work due to advanced age.

Returning several million net-negative economic migrants to their home regions would also be necessary.

mutatio2• 4 years ago

The ECB has its hands tied behind its back, perfect storms like this highlight one of the benefits of a country having its own currency and fiscal policy - the ECB cannot move like UK/US as reconciling Greece/Italy and Germany/Northern Europe can't be done without massive pain for the south.

fzfaa4• 4 years ago

It's time to inflict massive pain for the south. Can't spend any more decades wasting money.

causi3• 4 years ago

They've had thirteen years to stop their Wile E Coyote approach to fiscal policy and they've chosen not to do so because they wanted to ride the gravy train a little while longer. End of the line.

mojuba4• 4 years ago

On the other hand though, the Eurozone population pretty much equals that of the US, and surely there are a bit underdeveloped US states compared to the overdeveloped ones, right? So why is the EU bad idea and the US is not?

spywaregorilla5• 4 years ago

the article does not explain how a "gas crisis" leads to a weaker currency.
What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices:

The producer prices are rising because of the gas prices

NoMAD76• 4 years ago

Just wanted to add that prices are also rising because of higher transportation costs (sea, land, air), all are on the rise.

paganel2• 4 years ago

What does lead to a weaker currency? O

Much more expensive gas means the German economy goes kaboom, which is exactly what is now happening (afaik Germany recently had the biggest trade deficit in 30 years or something). The EU economy as a whole largely, largely depends on the German economy. The Euro is the currency behind most of that EU economy.

b1122• 4 years ago

Yet the article does not explain how a "gas crisis" leads to a weaker currency.

One thing I find weird (a touchy point?) is that the UK left. Yes, that was a few years ago, but my point is historical EU / Euro pricing is now diminished overall, in its up/down cycle.

COVID threw this asunder, so we did not see true fiscal results from UK leaving. And the UK left over a few years, making the departure less dramatic.

The UK comes in right after Germany:

https://www.investopedia.com/insights/worlds-top-economies/

and:

https://en.wikipedia.org/wiki/Economy_of_the_European_Union

Comparing the EU (18T) to the UK (3.4T) shows some impact here, around 20%. If the UK was still in the EU, I'd say the Euro wouldn't have dropped below parity.

Parity is an "OMG!" marker, and can cause cascading changes in perception to the strength of fiscal objects.

blibble2• 4 years ago

the UK never joined the euro

the europhiles in the UK attempted the first steps of joining (ERM1), which pegged the pound with the deutschmark

it was forced out when George Soros and friends attacked the peg on Black Wednesday

immediately prior to this the ERM was known an the Eternal Recession Mechanism (which is now exactly what the euro is)

tt293• 4 years ago

Because the UK's currency performed so much better against the USD since Brexit than the Euro?

Maybe check the facts first.

notahacker• 4 years ago

The UK wasn't in the Euro, and isn't the answer to Europe's issues with gas prices or interest rates. Sterling has fallen similarly against the dollar for the same reasons (and had a larger trend fall from a higher peak in the longer term). Brexit doesn't help anybody with the current situation, but it doesn't have much to do with it.

JacobiX• 4 years ago

The headline is "Gas crisis sends euro back below parity against dollar."
Yet the article does not explain how a "gas crisis" leads to a weaker currency.

It wasn’t clear (at least for me) why gas has such an impact on the economy as a whole because many articles concentrate the debate on the private households heating only.

But currently, most of the gas is used in the industrial sector (chemicals, power supply, food preparation), also for electricity generation and for producing materials such as ammonia, plastics, methanol and hydrogen.

onlyrealcuzzo2• 4 years ago

Deeply negative real rates and little indication that the ECB has the stomach for any substantive action.

You can't have positive real rates AND pump up the real estate bubble.

There are two parts to growth - population and actual growth.

The majority of "actual" GDP growth for the last 20 years in the West has been people paying more money (inflation adjusted) for the same land.

Why? Because you could! Interest only went lower.

Positive real yields mean people need to actually work instead of speculate on real estate. Most people would rather just speculate on real estate. It's so much easier.

Unfortunately, it's a zero sum game. The losers are renters.

blablabla123• 4 years ago

I agree that the losers are renters, at least for now. Although it does speak volumes that at the current stage professional investors in Germany are expected to shift investments into bonds because the yield will likely be higher. It's still popular with small scale investors but I doubt that many people are really familiar with the possible risks.

That said I'm curious how things will develop. Now that U.K. expects up to 18% inflation I wonder if the price-salary-real estate spiral in the metropoles can keep up its momentum.

nickff• 4 years ago

You seem to be implying or assuming that increased real estate prices lead to increased rent, but that's a non-sequitor; in fact, rents have become decoupled from real estate prices in many areas over the past 20 years.

blibble2• 4 years ago

the euro was supposed to make its constituent economies converge, but the exact opposite happened

the only real solutions are:

full fiscal union (the EU decides Germany/France/...'s budget, with redistribution)

or collapse of the euro

mhh__• 4 years ago

With financial news you can basically just say

"[current geopolitics] leads to price going [up or down]". Even with a survey of big players markets don't always have a simple interpretation

KingOfCoders8• 4 years ago

Last time a major war was in Europe, currencies tanked much more. I'm glad the EUR is as stable as it is while Europe is bombed by Russia.

jmnicolas2• 4 years ago

While it has the potential to become one, this is not a major war by any means, it's contained in south-eastern Ukraine.

KingOfCoders8• 4 years ago

Sure, no world war. But Russia has lost 45.000 people (roughly the same as US combat deaths in Vietnam) and 2000 tanks.

Most European powers are involved with weapon deliveries and target of economic warfare as well as targetting Russia. Several European states are targetted with cyberwarfare attacks.

HatchedLake721• 4 years ago

What's the definition of "major war"? It's the biggest war on the continent since WW2 where two countries with 100,000s of soldiers fight each other with modern weapons.

mytailorisrich4• 4 years ago

Europe is not bombed by Russia and there is no 'major war' disrupting the continent.

There is very localised war in Ukraine, which objective impact so far only concerns what Ukraine exports, mostly wheat at this point.

tzs• 4 years ago

It also has impacted what Russia exports. Some Russian exports are rather important to much of the EU.

lm284693• 4 years ago

mostly wheat at this point

Wheat and a few million people who had to leave their country, but yeah, wheat...

It obviously is a major crisis in Europe and has many ramifications, if all your neighbours mysteriously die in the same week it won't affect you personally but you surely will feel down or threatened. If it was just about wheat nobody would care, Ukrainian wheat isn't even exported to EU countries

rvense• 4 years ago

Can someone explain to me how raising interest rates combats inflation? Doesn't it do the opposite? If rates go up, financing becomes more expensive, meaning I'll need more money to do business, meaning I'll have to raise my prices to match?

robjan• 4 years ago

Borrowing becomes more expensive so it reduces the amount of cash sloshing around.

clownpepe2• 4 years ago

Just to clarify for the rest; the borrower (ECB) is literally printing new money every time they give out a loan.

mamonster2• 4 years ago

In financial markets its pretty simple: When you raise interest rates, you increase the denominator in the DCF calculation, so most assets are repriced downward.

karatinversion5• 4 years ago

But asset prices aren’t included in inflation indices…

swamp402• 4 years ago

I've always had this cognitive dissonance as well. Especially the link between rising interest rates and lowered food prices. I always ask and get ignored.

I suspect it's because that's all they can really do. They are a one trick pony.

karatinversion5• 4 years ago

There used to be a joke that the model was raise interest rates -> construction projects become unprofitable and get cancelled -> construction workers cannot afford food, reducing demand -> lower prices

rightbyte• 4 years ago

Ye it is all baloney. Higher rates gives more money to those with piles of money. Low interest rates does the same but in form of loans.

Neither sounds like they decrease inflation.

Rury• 4 years ago

Think about it like this. A lot of things are financed via credit/debt. For example, you buy a house, using a mortgage, which has an interest rate.

Some people might be able to finance a $500k house, at 0% interest rate for 30 years. However, with certainty there are fewer people who are able to finance a $500k house, at 10% interest rate for 30 years, as this costs much more. This means, as interest rates rise, fewer people will be able to secure and offer $500k for a house. As fewer people are offering $500k for a house, sellers will struggle more to sell a house for $500k, and eventually, there even comes a point where prices are forced to drop. As for how high interest rates need to get and how long they are in place to cause a decrease in prices, is mostly a guessing game, but eventually it will cause an effect.

Now, that said, initially people might try to raise their prices to offset the increase in financing costs, (and therefore adding to inflation like the parent post thought), but like I said, eventually there comes a point where they just won't find anyone who will buy their higher prices, because no one can afford those higher prices, and therefore prices must come down if transactions are to continue happening at all, and some transactions will surely continue to happen, as some money is better than no money, when you got a liability to pay.

And this also applies to food prices, along with most everything, in very similar but indirectly complex ways, mainly because most transactions in the economy happen via credit, then with actual money/cash. Let alone the fact that all money originates via central bank loans.

taylodl• 4 years ago

Here's the theory. The economy is "too hot", there's too much money circulating, and as a result demand increases which drives up prices. By making money more expensive, by raising interest rates, that money is taken out of circulation because it's more expensive and demand decreases which drives down prices. That's how things work in a normal market. Bottom line: economy is too "hot", i.e. high inflation, you raise rates. If you want to "juice" the economy then you lower rates.

karatinversion5• 4 years ago

The phrase to search is “transmission mechanism of monetary policy”, but generally, your customers’ financing is also more expensive, so they can afford less at current prices, let alone higher ones. Reduced income and increase expense means you cancel investments and lay off staff. The reduced demand for investment goods and workers means less upward pressure on prices.

LittleNemoInS• 4 years ago

Inflation occurs when demand is greater than production. This means there is too much cash flowing around. By raising interest rates, you tighten the cash flow : It's harder to get cash from the banks, thus the demand will diminish, and the prices will lower.

vkou2• 4 years ago

Can someone explain to me how raising interest rates combats inflation?

ELI5:

Inflation is directly proportional to the money supply. The more money is circulating, the more things cost.

Money supply is inversely proportional to interest rates. If I could borrow at 0% APR, I will happily borrow a trillion dollars, even if I had no idea what to do with it.

And now the important thing: In modern economies, when people borrow money, that money is magically created out of thin air and added to the money supply.

This means that when interest rates drop, money supply goes up, and inflation goes up.

When interest rates rise, money supply goes down, and inflation goes down.

There's a lag to these effects, and there's a limit to how much interest rates can affect inflation, and there are other factors at play, but this is the bare bones of it.

MichaelRazum• 4 years ago

Sure, there are some effects that come to play.

- Lets say you have a lot of euro. Interest rate is 0 and the US interest rate is 2%. Then you might think of selling euro and buy dollar to get the 2%. Especially if you think that euro/usd will decline further.

- Now let's say your interest rate is even higher now at 10%. A lot of houses in Germany produces something like 3% yearly revenue. So now you might start selling the houses with the same argument, since you could get 10% risk free compared to 3%. Housing prices go down, if you can't raise the rent.. Same effect on business that are doing just small revenue compared to the capital. It doesn't make sense to operate them. They quit -> consume less resources.

- Other effects like people spend less since saving becomes a bit more interesting. Firm's invest less, since the investment has to beat the interest rate.

PS: All that leads to a stronger currency. So your imports become cheaper and that helps a lot to fight inflation.

FollowingTheDao2• 4 years ago

Nothing to see here! Back to work! Put away the pitchforks! Keep voting! Move along now...

FollowingTheDao2• 4 years ago

I guess no one here has heard there is no more gold dollar?

All that is left is the petro dollar. This is the result.

vkou2• 4 years ago

Yes, now the value of money is tied to a mixture of policy and macro-economic trends, as opposed to how many gold mines opened last year.

klqquant• 4 years ago

Germany and Russia playing a Kindergarten war with Nordstream. Putin throttles Nordstream-1 and says he'd supply via Nordstream-2. Germany refuses to open Nordstream-2.

For Germany, apparently gas flowing through Nordstream-1 is ideologically pure, but gas flowing through Nordstream-2 is evil.

The West will continue to celebrate its hawkish Ukraine policies as a success. Looks like Taiwan will be the next success.

joshe• 4 years ago

“Let's be honest here: Europe's a museum, Japan's a nursing home and China's a jail. We don't need to worry about those currencies being some kind of major threat to us.” - Larry Summers

westpfelia• 4 years ago

Is this the same Larry Summers who openly knew about the practices that led to the 2008 crash and did nothing? Simply because it made him money?

fomine3• 4 years ago

Jail with top tier productivity

randomopining• 4 years ago

The idea of Merkel and the useful greenies in Germany is simply one of the most perplexing geopolitical decisions of the 21st century.

I'll never understand. If anybody knows the train of thought, please tell.

If Germany was more energy independent, Russia would be crushed this winter.

drpgq• 4 years ago

Wow EUR/CAD is below 1.30 as well. Glad I switched (against my will) to working remotely for a California company from a German one.

skinnymuch• 4 years ago

Why wouldn’t you want to work for an American company if given the choice? Isn’t the pay a lot more for American companies? Or am I off here?

vondur• 4 years ago

Honestly, There probably needs to be a Federal type government for Europe, much as the US is setup. The EU kind of reminds me of the US when the US was run under the Articles of Confederation before the current Federal system was adopted. It was very messy.

nopehnnope3• 4 years ago

Some problems with that:

* The US had a single national language (despite regional linguistic minorities). In the EU, the closest would be English, which is the universal second language but very few people’s first language.

* Relatedly, the US in 1789 was very culturally homogenous by modern standards. Europe is not.

* The wealth disparity between countries inside the EU is absolutely massive. Federation would lead to unfathomably massive wealth transfers from the North and West to East and South. This would lead to resentment and rekindled nationalism that would create extreme political strife and tear the whole continent apart.

lostmsu3• 4 years ago

I think the only real problem in this list is convincing countries to adopt English (people tend to be self-important).

Culturally, EU is quite homogenous. There may be 1-2 small countries with moderately different approach, but if you compare to the rest of the world, it is basically the same.

The wealth disparity in the US does not cause what you describe, so why would it happen in EU?

philistine• 4 years ago

Said like an American. Believing that the oldest, creakiest, least efficient democratic system of government in the world ought to be exported. Europeans are not looking at the US for democratic inspiration; they are looking inward, and good for them.

Euro falls below parity with the dollar

Related Stories