Posted April 19, 2022
By Sean Ring
The Euro and Yen Make the Dollar Look Great
- If you think the Feds policy is foolish, try Europes!
- ECB head Christine Lagarde will keep rates low for as long as needed.
- The ECB and Bank of Japan are destroying their respective currencies.
The Euro
The euro was always an elitist experiment with monetary powers they couldnt possibly understand.The thinking was that if you could get one currency to rule them all, the great unwashed would come to heel, wed never have another war, and a technocratic utopia would ensue.To be fair, this worked for a while, as it always does.But then reality reared its ugly head.Southern European countries like Italy, Greece, Spain, and Portugal simply couldnt keep up with northern Europes productivity.The French were always given a free pass whenever they broke budget rules.The result is a currency that serves none but Germany really, as a cheap euro helps Germanys superior exports like BMW, Mercedes, and Volkswagen.The story is coming apart again, as the euro heads into parity will the dollar.As the euro is the base currency in the pair, this chart shows the euro going down (and hence, the USD going up).
The Yen
Next up, we have Dollar-Yen.The Japanese have always been unreconstructed Keynesians for reasons Ill never understand.But like Germany, Japans economy is heavily dependent on exports.So their central bankers sell as much yen as they can get away with.The yen has been decimated against the dollar for the past two years.But this year, as the Bank of Japans easy money policy is clearly at odds with the Feds hawkish, tightening stance, speculators have crushed the yen.It helps to think of the interest rate differentials between two countries to see where the currency pair will be going.As youd rather have your money in a USD bank account earning higher interest (ridiculous, I know), the USD will have a better bid than the JPY, which has negative interest rates.
This chart is different, as the dollar is the base currency. So what youre looking at is the dollar materially strengthening (and hence, the yen seriously weakening).This chart shows the yen at a 20-year low against the dollar.The Dollar
Despite the Fed being behind the curve, Jay Powell being lost at sea, and inflation roaring through the US economy at levels not seen in 40 years, the dollar is still catching a bid.Looking at the Dollar Index, which is a trade-weighted index of currencies against the dollar, the dollar has been looking good since the beginning of 2021.
Why is that?For one, most commodities on the world market are traded for dollars, though Russia, China, and Iran are doing everything they can to change it.The significant tax base imputes value to the currency, as well.The IRS is pretty good at collecting taxes, making foreign investors feel safe.Finally, and perhaps most obviously, the US economy is the worlds largest and attracts enormous investment.Contrast this with Europe, which, though populated by an intelligent and productive workforce, is viewed as little more than an open-air museum.Policy Matters
While Europe is more populous than the US, it's still ages behind.The top 5 productive countries globally are all European: Ireland, Norway, Switzerland, Luxembourg, and Germany.Though, Norway and Switzerland arent in the eurozone.The US is number 6 on that list.Denmark, France, Netherlands, and Belgium round out the top ten.So, its not that Europe doesnt work.In fact, with only a 35-hour workweek, you could argue France is insanely productive despite all the cheese, wine, and cigarettes!And this is where it comes down to policy.The EU and its numerous tentacles strangle the economy with regulation, taxation, and expensive social policy.This, and trying to keep one currency afloat despite having numerous national finance ministries doing their own thing.Its an impossible task, but the reckoning would be insanely expensive.So theyll kick the can down the road even farther than America does.After all, if you think European security hangs in the balance, youll do anything to keep the game going.Thats why Lagarde, in her most recent press conference, said the ECB wouldnt do anything that could derail the European economys recovery.The best-case scenario for the European economy may be that Lagarde takes up the post of French prime minister in the case of a Macron victory.But Im not sure a Macron victory is the best thing for Europe.Wrap Up
I dont see this scenario changing for a while.The USD, shockingly, is the king of the heap.Or the prettiest girl in one ugly parade.Whatever gets you through the day.I just see it as two economies - Europe and Japan - who wont raise rates for any reason.The Japanese are fierce Keynesian ideologues wholl do anything to protect their exporters.The Europeans are scared theyll wreck their economy by making their citizens more prosperous.Having never lived in Japan, Ill reserve comment on their motives.But Europe needs a changing of the guard.Its one thing to get beat by a more dynamic, harder-working country.Its another thing to trip over your own feet on the way to the finish line.Until tomorrow.All the best,Sean
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