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More Bad News For The Euro?


Image source: GERARD BOTTINO / Shutterstock.com

What's going on?

The French investment bank, Société Générale, warned on Tuesday that it thinks the euro will drop in value “to parity” with the US dollar (i.e. $1 = €1) for the first time in 15 years (it was above $1.20 only a few years ago).

What does this mean?

An international investor weighing up whether to invest in the US or Europe has some pretty decent reasons to opt for the US right now. It’s thought that Donald Trump’s intended reforms will boost the US economy. In contrast, Europe is set for a year of political volatility as Italy holds a referendum in the coming weeks, France and Germany hold national elections and the Brexit negotiations (likely) get underway. Consequently, investors are moving money into the US – which is pushing up the value of the dollar or pulling down the value of the euro, depending on how you look at it.

Why should I care?

The bigger picture: A weaker euro is good for countries and regions that export goods – and for attracting tourists.
For example, German factories that sell goods to emerging markets should see a pickup in their sales as a result of a weaker currency. Also, more Americans might travel to France or Italy for their summer holiday as it becomes more affordable for them. On the flipside, the euro has strengthened versus the British pound – which has actually made things more difficult for Europe compared to Britain (e.g. it has become more difficult for European companies to export to the UK).

For markets: The weaker euro is making it easier for the European Central Bank (ECB) to achieve its goals.
The ECB would like economic growth to pick up in Europe and, relatedly, for inflation (i.e. the rate at which prices rise) to move higher (see our previous story for an explanation of why the ECB wants inflation to go higher). A weaker currency generally supports economic growth (see above) and it particularly supports inflation: as it becomes more expensive to import goods, prices for these goods are pushed up.

Originally posted as part of the Finimize daily email.

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