Now that the United States and Europe are entering the frenemy stage of their relationship, Europe can take solace knowing it has the upper hand in at least one key respect: The euro has been thumping the dollar lately.
As is often the case in currency markets, politics have played a big role in the euro’s ascension. Although 2017 has seen plenty of political upheaval, the euro has benefited from the easing of fears that the European Union will break up, a change that’s thanks in part to both the Netherlands and France electing E.U.-friendly chief executives.
In other words, the currency is benefiting because Europe has recently moved away from Trumpian nationalism. Granted, the continent is not out of the woods yet, but there has been just enough good news out of Europe lately that traders are increasingly willing to bet on a continued run-up in its economy.
“Not only has the eurozone not fallen off a cliff, their economic data is stronger than that of the U.S., and stronger than expectations,” said strategist Jack A. Ablin, chief investment officer at BMO Wealth Management in Chicago. “It’s actually surprising economists to the upside, which isn’t the case here.”
Ablin said he’s grown more bullish on the eurozone due to unexpectedly strong readings in recent months of its purchasing managers index, a gauge that reflects the strength of the manufacturing sector. The index hit a six-year high of 56.7 in April.
Such reports have helped push the cost of one euro just above $1.11 in recent trading. That’s about the same as it was on U.S. Election Day, but it’s up a striking 7 percent from post-election lows around Christmas. Analysts generally expect the surge to continue awhile longer, with some now setting targets for the euro of $1.20 or more by year-end.
Whenever there’s such a sustained currency move, it essentially means traders are growing more confident that one country or region’s economy will do better than another’s in relative terms. And ever since the world’s major economies stopped pegging currencies to gold in the 1970s, comparing currencies to one another is really the only way to gauge the relative value of money.
The conventional wisdom among analysts the last few years has been that Europe didn’t recover as well from the Great Recession as did the U.S., where fiscal stimulus was greater and was coordinated more closely with central bank policy. Even now, eurozone unemployment is more than 9 percent, which is more than double the U.S. rate — although both figures are at multi-year lows.
The question for currency markets is, Where are things headed? By that standard, Europe increasingly looks attractive to traders as an economy that perhaps has room left to accelerate growth, with a central bank committed to low interest rates that should spur expansion.
By comparison, America’s recovery may be getting long in the tooth, with the Federal Reserve apparently poised to raise rates soon in order to prevent inflation.
There are, however, some silver linings inherent in having weaker currency. Chief among them: The flagging dollar effectively makes it cheaper for Europeans to buy American goods.
Over time, that may help with the $68 billion yearly trade deficit with Germany that Trump has been complaining about of late. The pro-export nature of the weak dollar also tends to support American manufacturing and, by extension, the industrial workers on whom Trump courted as a candidate.