The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

A Weakening Euro ?

11/09/2017

So, the central banks in the United States, Canada, and England have all started to raise interest rates, as part of their normalization after the global financial crisis.  The ECB says they will also — someday.

Rising interest rates push that country’s currency exchange rates up.  Since the ECB declined to raise rates last month, the euro has declined 2% against the dollar.  That’s a huge move in one month.

The spread in interest rates between the U.S. and the ECB can be expected to rise, according to the futures market.  That spread is 151 basis points now but 200 basis points in twelve months.  That means the futures market expects the euro will continue to fall.

A weakening euro provides a tailwind to business in the ECB and a headwind to business in the U.S.  More importantly (?), that also means it will be cheaper to wait until next year before booking a European vacation.

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