Thursday, February 5, 2015

Opinion: Will it be 1 USD = 1 Euro soon?

All stocks, commodities and currencies or anything traded for that matter see fluctuations. But when a trend persists, it is clear that there is some fundamental change going on. So with the Euro currency. It was above 1.5 against USD during the 2008 financial crisis, and it seemed to be a stronger currency. But Europe too was drawn into crisis, thanks to PIIGS. Now US seem to be pulling out itself out of economic mess but European central bank announced a QE signaling its troubles are not over.


Why and When?

One would argue that it is the case of a stronger Dollar than a weaker Euro, and that argument is true to some extent. Dollar index has become stronger and would become even stronger when Fed begins raising the rates during later part of this year. At the same time, ECB announced bond buying program to pump more Euros into the banking system expanding its balance sheet. These two factors will drive down Euro further to peg one Euro to one USD by the end of the year.

Who will benefit and who will lose?

A weaker currency makes exports competitive, so the net exporting country, Germany, is set to gain. But at the cost of other partners of European Union as they do not have the same competitive advantage that Germany has. Their imports will become expensive. But the fresh and cheap Euros hitting the market buys the troubled countries time to turn around. As Germany is the biggest lender to its neighbors, they would show patience and a weaker currency boosts their domestic economy too.

If the situation continues this way for some more time, Germany or Germans will end up owning significant assets all over the European Union countries before Europe recovers and begins it economic growth again. 

If ECB’s program does not produce expected results, and if Greece, Spain opt to have their own currencies, Euro would become much weaker against USD. Though it is less probabilistic now as ECB’s aim is to avoid that situation, in case if it comes to that, Gold will be the ultimate gainer as currencies do not remain successful in preserving the value.