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In a recent interview in Barron’s, Carl Weinberg, Chief Economist with High Frequency Economics, stated that Europe is in a depression, with the United States still recovering from The Great Recession. This state of economic affairs is what is, so far, defining the Eurodollar and United States Dollar trading relationship. As the United States continues to recover from The Great Recession, the actions of the Federal Reserve will have the most pronounced impact on the EUR: USD relationship.
This results from the trillions of US Dollars that have been deployed to recapitalize the global financial system, both public and private. This effort continues today with Quantitative Easing III entailing the acquisition of $85 billion in Treasury Bonds and mortgage-backed securities monthly by the Federal Reserve each month to maintain the low interest rate environment in the United States. Part of this multi-trillion dollar effort by the Federal Reserve is a currency swap program to maintain the stability of the EUR:USD relationship.
There are many reasons for the Federal Reserve to invest so heavily in the value of the Euro. With a strong Euro, American exporters have a discount to when selling goods and services to the Euro Zone nations. Due to the same factor, exports from the Euro Zone to the United States are also priced that much higher. This is particularly crucial with Germany as a member of the Euro Zone as it would enjoy a tremendous economic advantage if the EUR: USD relationship was to tilt in favor of the continent’s exporters.
A strong Euro also keeps China and Japan in business. About 40% of the Chinese gross domestic product is based on exports to the United States and Europe. A Euro with more buying power keeps the world’s second largest economy growing, which is critical as the People’s Republic is the largest consumer of many commodities. There is no way Japan will ever be able to pull out of the more than 22 years of its “Lost Decade” if it cannot export to Europe.
For those looking to trade EUR/USD, there will always be a floor. A healthy Europe is in the best economic interest of the United States. For that reason, the American taxpayer, through the aegis of the Federal Reserve, has been very generous in preserving the structure of the EUR/US trade.
This will continue as the United States continues to recover from The Great Recession. As Federal Reserve Chairman Ben Bernanke stated in his speech last September introducing Quantitative Easing III, the intent of the program was to reduce the US unemployment rate to 6.5%. That will not happen without Europe, Japan and China consuming American exports. For that to transpire, the EUR:USD relationship must remain within a stable trading range.