What does the strength of the euro mean?

A weak dollar usually means a strong euro. The United States, in anticipation of fresh monetary policy stimulus to fuel economic recovery next year, and the euro could rise much faster as a result. We already have several vaccines, but the number of infections has increased dramatically. We know vaccine development is only part of the story. The distribution, which is the other part, has yet to take place. Which means we’re fine but we’re wrong. I mean we’ll get out someday, but things are sure to get a lot worse before they get better. What does the strength of the euro mean for Spain? What does this mean for us?

The European Central Bank is much more conservative than the United States Federal Reserve. In many ways, he has remained indifferent to the currency war that stems from the trade war between the United States and China. Currency war? Yes, competitive devaluation is often used by countries to increase their economic competitiveness in the international market. China devalued its currency to defend itself against tariffs imposed by the Trump administration. And now we have a cold currency war in the world. In other words, devaluation as an economic weapon.

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What does the strength of the euro mean?
What does the strength of the euro mean?

When we speak of “devaluation” in connection with the dollar, euro and yuan in today’s currency war, we have to forget about Latin American-style devaluations. To understand this phenomenon, we need to understand that we are speaking in a different context. For example, the devaluation of the Venezuelan bolivar is not comparable to the recent devaluation of the dollar or the recent devaluation of the yuan. It is not that Venezuela is deliberately devaluing its currency in order to increase the competitiveness of its exports in the international market. The failure of the bolivar is not a beneficial strategy. It’s just a mess. In short, they are very different situations.

Of course, he mentions the special case of the bolivar here, as it is an extreme case. However, the same applies to devaluations in other countries. Argentina, for example. In the context of the more developed economies, the weakness or strength of the currency should be understood as relative. The dollar and the euro are extremely stable and successful currencies. The fact that the euro is stronger than the dollar does not mean that the United States economy is inferior. At its core it’s about monetary policy. A weak dollar is beneficial in many ways. A strong euro is a disadvantage in many ways.

Why is the dollar worth less than the euro? Here is the simplest answer to a very complicated question. The European Central Bank is different from the United States’ Federal Reserve. In other words, the ECB is more conservative than the Fed. The mandate mission of the European Central Bank is unique: currency stability. In other words, keep inflation below 2%. The Federal Reserve, on the other hand, has two roles: currency stability and job creation.

This dual mission of the Federal Reserve implies a much more flexible monetary policy. Because of this, we can say that the role of the Federal Reserve is much more active. In the case of the European Central Bank, we would speak of a more passive role. In fact, the Federal Reserve has more powers than the European Central Bank. In relation to open market operations, the reserve uses this tool almost at the abuse level. Here I am talking about quantitative easing. The famous QE. This is the practice of buying financial instruments such as government bonds and corporate bonds on the open market in order to add liquidity to the system. In general, the European Central Bank is not as permissive as the Reserve in this regard.

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The difference in attitudes may be of cultural origin. The northern European countries are economically much more economical and conservative. And this group is the one taking the lead in money matters in Europe. Americans, on the other hand, are naturally more optimistic and adventurous. You are not afraid of credit. And in general they take more risks in business.

Of course, not everything is due to mission or culture. The dollar is allowed to have, in large part, exceptional money issues, due in large part to the hegemony of the dollar as the world’s reserve currency, the dollar’s role in world trade, the strength of the US financial system, the size of its economy, and the power of US Companies worldwide. In other words, the United States can afford to print money without much trouble. This is part of the benefits of the global reserve currency.

However, What is the problem with the (relative) hardness of the euro? In many ways, the relative toughness of the euro is not a problem as the countries of the European Union trade a lot with each other. On this side, growing in the European market is the best option. While a strong euro makes European exports outside the bloc less competitive, a strong currency is beneficial for imports.

The case of Spain is complicated in many ways. The strength of the euro has advantages and disadvantages. However, this is a clear disadvantage for the tourism sector. The strength of the euro makes other destinations more attractive. Turkey, for example, with a much weaker currency, has become one of the main powers of Spain. For an Englishman, a German or a Russian, the money is much more in Turkey than in Spain. With the arrival of the holiday season, the euro exchange rate becomes important for tourists.

What does the strength of the euro mean for Latin Americans? Well, not much, actually. The Latin American usually hedges against inflation in dollars and invests in the United States. The most important pair is the dollar / local currency pair. In this case, stability is sought. And the dollar is the most mobile currency in the vast majority of Latin American countries. The euro is not as mobile in Latin America and in many cases this affects its rate in local currency. For example, in Venezuela, a $ 100 bill is usually worth $ 100, which makes the dollar-euro inequality irrelevant in the international market.

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When an international company is operating in Europe, the strength of the euro has a positive effect on the company’s books. With that in mind, it would be great to receive euros. The problem lies in the expenses. The equation is not favorable for people with expenses in euros and income in other currencies.

With Bitcoin, the dollar is the most important currency. And the Federal Reserve’s flexible stance is a real boon for the price of Bitcoin. Of course, this doesn’t mean that it’s a bad idea to invest in Bitcoin if your income is Euros. In this case, Bitcoin easily adapts to changes in the euro / dollar exchange rate.

A currency war is not a very good idea right now as it will sooner or later affect international trade. However, deflationary pressures in the US and Europe persist. Which means that the stimuli will continue on both sides. Regardless of the exchange rate between the euro and the dollar, Bitcoin will benefit from this easing of monetary policy, just like the stock markets.

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