The Euro Slides As American Dollar Strengthens

Posted: Jan 25 2015, 1:18pm CST | by , Updated: Jan 25 2015, 1:22pm CST, in News | Latest Business News


The Euro Slides As American Dollar Strengthens
Credit: Getty Images
  • The ECB begins quantitative easing.
  • Euro continues to fall as Swiss franc rises.
  • American tourists and investors remain optimistic.

The Euro continues to tumble as the American dollar rises. Investors and exporters curious about the potential increase to American recovery.

Currently, the European Central Bank seems to be a bit of a crisis. The Euro is plummeting to all-time lows as the American dollar gains strength--a reversal of the 2008 housing crisis in the United States.

According to the New York Times, E.C.B's falling valuation may be good for American investors and tourists. As the Euro falls, more investors and American products may find space available on merchandise shelves. (European fans of Oreos, rejoice.)

But the question becomes will Europeans be able to afford American products? However, the lopsided value will lower travel prices for Americans, something of a boon after the astronomical prices during the dollar's struggle to restabilize.

However, American financiers deliver a cautious warning to manufacturers expecting an export increase. The newspaper notes less than a quarter of 2013's gross domestic product of $3.2 trillion went to the eurozone. And consumers should not expect the prices of European luxury goods to fall too far, either.

Chief economist Ian Shepherdson advised Times travel readers to avoid buying large sums of Euros just yet. "Wait for the trip. It wouldn’t surprise me in the least if the euro was even with the dollar by April.” described the latest fall as a response to the ECB announcing “it’s larger than forecast quantitative easing programme.” Additionally, “the single currency was unable to rally as economists shrugged off better than forecast flash PMI data out of France and Germany and instead focused on Sunday’s Greek general election.”

BBC reports that quantitative easing is simply when the ECB buys government bonds. But what does it do beyond that, exactly? Well, a central bank buys the assets like bonds and then uses that money to “buy bonds from investors such as banks or pension funds using this "new" money, which increases the amount of cash in the financial system, encouraging financial institutions to lend more to businesses and individuals.”

So how is the eurozone planning to handle the situation?

“The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy.”

Seems a little complicated, doesn’t it? But it’s been known to work since the Bank of England and the U.S. Federal Reserve have each used the method after the 2008 crisis. However, analysts remain tentative on the ultimate outcome because investors pay more for the same income and that’s a very risky business in an unknown quality, such as the ECB.

Earlier this month, Lithuania and the national Lietuvos bankas joined the Eurosystem with Euro circulation starting on January 1. Joining the financial system brought the total number of nations using the Euro to 19. Lietuvos joined the Single Supervisory Mechanism—a system that places bigger banks under ECB supervision—while “three Lithuanian banks (SEB bankas, Swedbank and DNB bankas) fall under the direct supervision of the ECB.” As of January 16, the Euro had successfully completed the changeover in Lithuania.

So how does the latest ECB plan to expand the asset purchase program affect changes to the newest member? The Central Bank hopes that plans will offer an “easing of financial conditions” facing businesses and citizens. “Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound.”

This is what the Times refers to a very good thing by pointing out that “traders cheered the announcement by policy makers in Frankfurt, with broad market averages in the United States rising by more than 1.5 percent.” As the U.S. Federal Reserve begins to raise short-term interest rates later in the year, the global market looks to balance itself in the middle of a growing crisis in Europe.

However, the Swiss National Bank’s decision to close the currency peg policy implemented to keep the Euro strong may end up backfiring.

While many Swiss citizens bought Euros and planned weekend trips to France and Germany last weekend, the stock market plummeted.  BBC states that since “one in every two Swiss francs is earned in the Eurozone [and] 60% of all Swiss exports are sold in Europe” the prices have become 20% higher for consumers. And many Swiss leaders are looking at the government with an expected recession to hit as product orders are already being canceled. So a move meant to prevent a recession may have inadvertently pushed the nation into one.

As a market, the eurozone represents a lot of the European wealth, especially in Germany, so a financial recession would only negate the hard work over the past five years to re-stabilize the global market. No one can safely predict the financial expectancy of the Euro at the moment, but if the currency continues to lose value, many citizens will be left with tough choices. A sentiment many Americans understand and sympathize with.


Sources: New York Times, European Central Bank,, BBC

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