When ECB chief Mario Draghi earlier this month warned that “there are forces in the global economy today that are conspiring to hold inflation down,” he was not just talking about commodity prices (oil in particular), but about the strength of the Euro: the common currency had just reached its highest level against the US Dollar since October on Friday, and against Sterling it has not been this strong for more than a year.
A strong Euro allows Europeans to buy foreign goods more cheaply, and to a bureaucrat like Draghi that is bad news. While you would think that Europeans should be happy that they can get more stuff for the same money, mainstream economists have a deep fear of falling prices. They fear the economy will grind to a halt if prices are not rising fast enough. Whether they really think their concern is shared by ordinary people is not clear; does anyone truly believe that if the price of shopping is decreasing people actually stop spending? It is a topic for another day though. If we accept their premise, then Draghi is indeed right to be concerned, because the Euro – despite the overwhelming problems still faced by the Eurozone, where governments are buckling under mountains of debt and banks are still to be cleaned up after the financial crisis – is generally viewed as undervalued against other major currencies.
The problem for Draghi of course is that while he wants the Euro to depreciate, central bankers across the world are worried about their own currencies strengthening. Witness the Bank of England’s Mark Carney’s dovish comments after the latest Bank of England policy meeting; he too is concerned that prices are not rising fast enough, and he too recognises a weakening currency as a primary tool to counter the trend (he can take comfort in the fact that Sterling has tanked against every other major currency this year). The Fed are now (predictably) being broadly accused of a policy mistake in raising rates at their December meeting, not just because they started a crash in Global equity markets, but also because one of the very reasons for the bearish sentiment is a recognition that the strong dollar in itself represents a problem for the US economy, so it hardly needs the support of a hawkisk central bank. Not that a falling USD would be a cure by any means, but the mainstream is still delusional enough to think that the US economy is fundamentally strong, if it just wasn’t for all those damn external influences. Of course it is not, the US has had its boom like every other debt ridden economy, and the bust is lurking around the corner. But a weakening currency would certainly help in postponing the inevitable. It is a shame that everyone’s currency can’t be selling off at the same time.