The
European Central Bank recently announced that it will be engaging in a 60B Euro purchase of bonds. The Euro has depreciated more than 12% since the beginning of the year and is at its lowest point in over a decade. The fall will help exports, and will help stave off depreciation. The bonds that The European Central Bank are being forced to buy are valued at below -0.2%. One might think that such low yields would deter non-governmental buyers, however some buyers are forced for regulatory reasons to hold bonds; however, low yields are attractive to no one and investors will undoubtedly move elsewhere to place their funds.
Meanwhile…in the US the Fed’s moving to increase rates. After a two-day meeting, the Fed agreed to drop “patient” from its monetary-policy statement, meaning that it will likely raise rates from their rock bottom lows for the first time since 2008. With unemployment lower and economic expansion looking solid the consensus is for an interest rate rise. Higher rates in America will mean that more investment will come back to the states and consequently the dollar will likely appreciate even more relative to other countries hurting exports; the latest data show manufacturing output falling by 0.2% and car output falling by 3%.
Sources: A loss of patience, The fall of the conundrum
5 Comments
“…will help stave off depreciation…” HUH??
Look at the earlier post on the most recent FOMC meeting. If you read the actual announcement, the Fed notes that “moderating growth” is one reason they are not yet indicating a near-term rate increase. Instead they’re effectively saying “maybe this fall.”
I agree that the rate hike will almost certainly not come in June. September rate hikes also seem unlikely based on reports in the news. Quantitive Easing by the European Central Bank has allowed the dollar to steadily appreciate relative to the euro, but this past week has also seen a lot of volatility in the currency market. This will certainly be something the Fed looks at before finally raising interest rates.
I agree Stephen. The Fed’s most recent statement included language certainly hinting towards currency concerns. It is quite hard to raise rates in a world of currency devaluers.
Its interesting to see that the stronger dollar will make European goods look more attractive relative to U.S. goods, which should help the European economy at least a little.
A typo: surely €60 billion per month, not total! — the latter would be too small to notice in markets with trillions in assets.
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