Wednesday, October 17, 2018

Euro's Value Is Being Buoyed By Anti-Trump Sentiment

Currently, Euro Trades At About 1.15 To The Dollar
Italy's debt remains a "quiet roar" unnoticed by many even ignored but an unfixable problem that will not go away. We can only speculate as to how events will unfold in the continuing saga playing out in the Euro-zone between Italy and Brussels. If the populist-led Italian government backs down it will not make their debt vanish or result in an improved future for the country, it will only set back for a bit the day when all parties must face the realities of the situation. Few people deny the ingredients of a debt crisis exist in Italy, a huge amount of questionable debt, weak banks, an erratic government. and a sizable economy able to inflict collateral damage outside Italian borders.

The Italian government has no intention of backing down from their budget stance despite threats from the ECB to provoke a Greece-style banking crisis if the Italians don't yield. This should be crushing the euro. Ironically, in many ways, a great deal of the recent support for the euro has been generated as a reaction to the Trump administration's unpopular actions such as unilaterally reimposing sanctions on Iran. Acts like these are eroding the dollar's global appeal. Trump’s unilateralist approach to foreign relationships is reshaping the world in profound ways by undermining multilateral institutions. This means other countries see this as an opportunity to develop new geopolitical capabilities which play out in the currency market.

His Detractors Find Trump's Logic Challenging
The world has reacted poorly to many of the President's policies and whether his supporters want to admit it or not Trumps weaponizing the dollar has played out in a negative way for the dollar. It has also had the effect of bolstering the euro which has in the past been viewed as one of the few real alternatives to the dollar even if it means sweeping under the rug the reality that internal strife is threatening to tear the Euro-zone apart. By focusing on the media's negative spin on Trump and their reports that he can do nothing right, it makes investors more willing to speculate on the dollar falling out of bed and being shunned by one and all. Even the apparent killing of a Saudi born journalist in Turkey has been spun to feed into this narrative.  

The Dollar Remains The Only "Real Option"
The backlash against the dollar has been spurred forward by the US threatening to penalize companies doing business with Iran by denying them access to US banks. This has created a wave of speculation that such talk could hasten the dollar's demise as the main global currency. Currently, the euro is the world’s second-leading currency but it lags far behind the US dollar. Two-thirds of all loans issued by local banks in foreign currencies are denominated in dollars, compared to around just 20% in euros. More important is that similar proportions apply in the area of global foreign-exchange reserves.

It is simply not a case of many countries feeling they must question their bonds with America and whether they can continue to regard the United States as a reliable alliance partner but the pressures of a changing world that are heightening concern of currency valuations. Like all fiat money, the dollar is nothing to brag about. however, at this time the other options are even less compelling. The major Central Banks being well aware of how devastating currency moves can be have gone out of their way behind the scenes to stabilize an unstable situation which they created with a decade of QE policies.

The argument that currencies are trading in a false paradigm extends past simple manipulation and is bolstered by their being sheltered from the storm of volatility by existing in a rather closed system in which wealth tends to become trapped. The reality is that after years of doing "What Ever It Takes" Draghi must be at wit's end. No real solutions exist for the Euro-zone as it confronts the grueling challenges before it of remaining competitive in the global marketplace and the political unrest brewing within its borders only complicates the task.

Footnote; For more on the euro see visit the link below.

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