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Euro Currency Still Faring Well, For Now

Filed by KOSU News in US News.
July 11, 2012

The euro currency touched a 2-year low against the dollar Tuesday, as concerns about the euro-areas debt crisis continued.

Despite a recession across much of the eurozone and even predictions of the currency’s demise, however, the euro has held up relatively well during this crisis.

Over the last 13 year, it has taken on average $1.21 to buy a euro. Now, even in this midst of this crisis, it’s worth virtually the same ($1.22).

Mark McCormick, a currency specialist at Brown Brothers Harriman in New York, says that exchange rate pretty accurately captures the relative buying power of the euro compared to the dollar. But he admits it doesn’t reflect the risks that the eurozone might crumble as some headlines suggest.

“It’s hard to actually gather up those tail risks of a doom-and-gloom scenario and ascertain how that may impact the euro,” McCormick says. “I think the primary consensus is that the eurozone is going to stay together.”

That’s not the view of Simon Johnson, a senior fellow at the Peterson Institute for International Economics in Washington. He thinks currency investors are over-valuing the euro because they aren’t pricing in huge downside risks.

“I don’t think that the investors have sufficiently taken onboard the risk of a dissolution of the euro,” Johnson says. “Meaning that if the euro no longer exists as a currency 18 months from now, how are you going to get paid in a contract that specifies in euros?”

Johnson, who is also a professor at the Sloan School of Business at MIT, also thinks the collapse of the euro is a distinct possibility.

“Looking at the prospect of the eurozone itself, I would say they look pretty bleak,” he says. “That currency union is going to crumble over time.”

Other countries like Russia, Thailand and Argentina have also faced severe financial and economic crises in the past. But, unlike the euro, their currencies plunged as capital fled to safety in other countries. The euro has avoided that fate because parts of the eurozone, like Germany, remain strong, says Johnson.

“What’s different now of course is that the euro itself is a reserve currency,” he says, “it’s used by central banks [and] it’s used by investors as a form of safe haven.”

That’s largely because Germany remains economically strong, and Greeks and Spainards don’t have to sell their euros to move their money to safer German banks or government bonds. In that transaction the value of the currency doesn’t change.

Former IMF chief economist Ken Rogoff says that while the euro may be close to its long-term value against the dollar, that’s partly because the dollar has lost value against most major currencies over the past decade.

“The dollar itself is weak, and if you measure the euro against all its trading partners, China, Latin America, etc., then it doesn’t look so good,” Rogoff says. “Actually by some measures it’s at an all-time low.”

Rogoff, who now teaches economics at Harvard, says he thinks the euro will fall much further even against the dollar.

“My instinct is that it will go down even as low a one; on parity with the dollar, maybe within the next year,” he says. “That’s really a distinct possibility.”

Rogoff cautions that second guessing the currency markets, which are among the largest markets in the world, is a tough game. He says, economists are still somewhat mystified as to why many currencies are priced the way they are. [Copyright 2012 National Public Radio]

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