Much is at stake in the Eurozone should the fabled 'currency
war' be ultimately waged as the price will be paid in both growth
and jobs amidst fresh tensions about the future of the bloc itself.
Few would doubt the euro area has been routed in the latest
monetary battles between countries printing reserves and depressing
home currencies in part to retain an acute trade advantage in a
world sapped of growth.
In Asia, Japan's plan to aggressively weaken the yen has been the
proverbial warning salvo, however that merely counters the
open-ended bond buying and dollar creation by the U.S. Federal
Reserve, sterling printing in Britain or even Swiss intervention to
cap the franc. It leaves the European Central Bank (ECB) as the
last remaining constituent of the "Big Four" reserve currencies
still unable or unwilling to generate new cash and sequester its
exchange rate over time.
This point was underlined last month by early paybacks on what had
been the ECB's proxy printing plan of cheap long-term loans to euro
banks (or LTROs) - repayments, which have lead to an untimely
shrinkage of the ECB balance sheet as its economy shrinks, creeping
short-term interest rates and a rising euro. In just three short
months, the euro has now soared a staggering +20% against Japan's
yen, +8% on sterling and +7% on the US dollar - the latter
compounding gains against a host of dollar-pegged, emerging
Last month, ECB chief Mario Draghi pointed out that the euro's
trade-weighted index (
) has been better behaved and is still down more than +10% from its
However, this euro index too has jumped +6% since November and is
up almost +9% since Draghi's "whatever it takes" speech in July
consequently defused the bloc's sovereign debt crisis.
According to Morgan Stanley economist Elga Bartsch, "there is a
risk of the euro overshooting and derailing the zone's tentative
stabilization by sapping exports, capital expenditure and corporate
profits - a much stronger euro could challenge the positive market
vis-a-vis the periphery and structural improvements in
competitiveness seen there."
One irony of course is fact that the euro's rebound is partly due
to the healing of the bloc's crisis since July and the gradual
resurgence of investors towards peripheral bond and equity markets,
once left for dead. Though for all that relief, an expected
contraction of the bloc's economy for the second straight year in
2013 means it's also the area least able to weather a currency hit
Additionally, Morgan Stanley's 'ready reckoner' shows a permanent
+10% euro index rise could cut -0.5% off growth over the next year
and threaten to topple its forecast for a +0.5% in growth in 2013
to a loss of almost -1.0%.
Calling for a medium-term euro exchange rate target to guide
policy, French President Francois Hollande on Tuesday warned of
'irrational' currency moves at odds with the underlying economy.
However, with little clarity yet on what that would involve, the
masses look to Draghi to ride to the rescue yet again and hope for
some hint of future interest rate cuts after Thursday's ECB
Short of dramatic change to either the central bank's mandate or
inflation forecasts however, few are holding their breath. At best,
ING economist Carsten Brzeski reckons the euro jump "put its foot
into an almost closed door towards a rate cut." In the meantime,
the threat of extreme appreciation returns us to the
one-size-fits-all quagmire at the heart of the euro blowout over
the past three years.