It has been a week since Europe woke up with the news the United Kingdom had decided to leave...
A weak euro for long: 7 days of Economics
- The euro is very low again vs. the dollar
- A situation that is likely to persist
At around USD 1.05 on 5 January, the euro is trading at one of its lowest levels against the dollar in the past 15 years. It is also very cheap regarding its purchasing power parity (USD 1.30), an advantage for European exporters that is bound to persist. This can almost entirely be attributed to the monetary policies of the US Federal Reserve (Fed) and the European Central Bank (ECB), which are completely out of phase.
Whereas the first has begun to raise key rates, the other is resolutely holding the cost of money below the zero lower bound. The Fed halted its quantitative easing programme – the modern version of printing money – in October 2014, while the ECB is pursuing QE at a monthly pace of EUR 80 billion (soon to be reduced to EUR 60 billion).
As a result, the already historical-wide yield gap, which largely governs the weakening of the single currency, continues to widen.