Euro Downer

The market's unflinching barbarity
Toward the euro zone's flagging prosperity
Has its rate on a path
From a buck-and-a-half
Toward - eventually - dollar parity.

The euro has reached an 11-month low of $1.30, accelerating a trend that has seen the Old World's currency decline 12% from a high of $1.48 in May. As usual, the reasons are many; they include the belief that Europe is headed for a recession if its leaders do not soon restore confidence. European banks are poorly positioned to ease a credit crunch, as their piles of idle cash result from mandated deleveraging and recapitalization. Even the European Central Bank is contributing to euro weakness, based on the expectation of future rate cuts, which typically devalue a currency.
Chart courtesy of The Wall Street Journal.

Currency Conundrum

An economy gripped by stagnation
Needs a weakening currency flotation,
But on this point, the Fed
Punts to Treas'ry instead,
Who repeat their "strong dollar" fixation.

UC Berkeley Professor Christina Romer, erstwhile head of President Barack Obama's Council of Economic Advisors, opined in the New York Times over the weekend on the disconnect between reality and posturing on the value of the dollar. While a weak dollar would encourage US exports and foreign investment inflows in a time of economic weakness, no US public servant will acknowledge this point, except to complain about the artificially low Chinese yuan. Failure to voice support for a Strong Dollar evidently brands one as un-American at home, and unfairly American abroad.

Tip o' the hat to Professor Greg Mankiw.

A Leading Indicator

The Jobless Claims number's expected
To predict whither growth is directed,
For there's much one may plumb
When aware what the sum
Of those getting an unemployed check did.  

Indeed, a higher-than-expected jobless claims number yesterday helped to drive the dollar lower against the euro, which now costs nearly $1.50.  In combination with Fed Chairman Ben Bernanke's dovish comments at his first-ever press conference, the indication of higher unemployment tells the markets to expect a period of slow growth and low interest rates in the US, both of which would make other currencies more attractive.

Hu Wants a Strong Dollar?

Declared China's President Hu:
"With the Fed buying bonds as they do,
It touches raw nerves,
As our dollar reserves
May devalue a trillion or two."  

President Hu Jintao of China, in preparation for his state visit to Washington this week, expressed his unease with the course of the US dollar.  Responding to questions from the Wall Street Journal and Washington Post, President Hu said that the dollar as the international reserve currency is "a product of the past."  He also worried about the impact on China's $2.85 trillion of US currency reserves of the Fed's "quantitative easing" policy of buying treasury bonds to lower interest rates.  China fears that such stimulation will export inflation and cheapen its US dollar investments.  

Of course the Fed, as steward of the world's largest free-floating currency, does not have the luxury of the more direct forms of manipulation practiced in Beijing.  These are a source of irritation to many in the US, as they tend to cheapen Chinese exports and exacerbate the trade imbalance.  Should make for some interesting state dinner conversation with President Obama.