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::: Just where is the EURO GOING?
by Diego Pastori
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These past twelve months we
have seen some crazy changes in
the exchange rates. What are the
reasons? ...
Currency exchange rates should
refl ect the competitiveness of
and trust in international financial
institutions. These past twelve
months we have seen some crazy
changes in the exchange rates. What
are the reasons? Here is my personal
attempt at an explanation for what
has happened and to forecast future
trends. Statistics tell us that the Euro
continued to be strong on the currency
markets in 2009. Its exchange
rate with the US Dollar in particular
rose above 1.50 Euro per Dollar.
The reasons given by economists are
mainly the economic crisis, the failure
of the main US fi nancial organisations
and the massive injections of cash for
all American banks in order to avoid
further damage. A similar system in
Europe was adopted by Member State
governments to help the banks, but
with different methods and timing depending
on the individual characteristics
of each country. Generally speaking,
the economic crisis and the trend
in rates favoured the USA, making it
more attractive for all other countries
to trade with the US, encouraging a
faster economic turnaround and, basically,
transferring the “cost” of the USA’s loss in economic power to the other
countries. These were at the time in
a peculiar situation, what with the
Japanese Yen becoming stronger
despite very low interest rates. It
should be remembered that in
the past, prior to 2009, changes in
exchange rates were strongly influenced
by the discount rates applied
in the various countries. Everyone can
recall the Italian situation in the 1990s
when high interest rates and devaluation
were deliberately provoked by the
Italian government in order to keep
the country competitive, even though
the economy was growing rapidly at
the time, at the same time offsetting
an equally high rate of infl ation,
which made it diffi cult to normalise
the exchange rate with foreign currencies.
With the advent of the Euro
- and despite signifi cant internal difficulties - Italy managed to maintain
its (calculated) ratio of infl ation and
competitiveness on the same level as
the other countries, as imposed by the
European Community.
In the early months of 2010 the economic
situation was virtually the same
in all the countries considered to be
the major producers of wealth: low economic growth, low interest rates
(even zero percent in Japan), a weak
Dollar and other currencies looking
quite strong. We should remember
that in those months the Euro/Dollar
exchange rate was constant at 1.50.
Foreign currencies then began to fall
against the Euro during 2010, with the
Dollar at just 1.19 by June 2010, while
the Japanese Yen went from 127.24 in
April 2010 to 106.19 in August of the
same year and the Swiss Franc fell from
1.45 in May 2010 to 1.28 in September
2010. These huge fl uctuations were
not justifi ed by a changed economic
climate: c. 30% for the Dollar and Yen,
15% for the Swiss Franc (normally a
safe currency). Economists have seen
this as the sign of a re-alignment in the
situation, a way for economic operators
to restore the ratios between the
various currencies to less divergent values, as the Euro was held by all to
have been overvalued with many benefits
in terms of imports but disadvantages
when it came to improving the
situation in terms of economic recovery.
Then the situation changed again:
at the end of September 2010 the exchange
rates became 1.37 against the
Dollar, 114 against the Yen and 1.34
against the Swiss Franc. Variations of
this magnitude have hardly ever been
seen in the past, except after special
events (terrorist attacks or economic
crises in a given country). The economic
situation in 2010 has not, however,
changed: there is low growth in
GDP, central bank interest rates have
not altered and no extraordinary
events have happened. So while the
fall in the value of the Euro might have
been partially explained by the alleged
risks of bankruptcy faced by certain
Member States (especially, Greece,
Portugal and Ireland), how can we explain a variation of some 10 percent or
more since this summer?
In my opinion, there is now no firm
control over the currencies. This fact is
far more serious than people think. It
is a demonstration of the incapacity of
the Central Banks to limit the interests
of the individual financial operators on
international markets. Just think about
the interests created in the increasing/
decreasing level of credibility of a government
or governing body when currency
exchange rates rise or fall. This
can cause a great crisis in the economy
of a people with devastating effects.
To sum up, the only reason I can see
in these fluctuations in the exchange
rates is that a few people are speculating.
People with too much economic
power. I cannot believe that the banks
are unaware of this, yet it is undeniably
true that they have not informed
the public of this situation. The global
market is offering help only to those with a personal interest in financial
matters. The banks, the multinationals
and even the criminal world appear to
have far more power in controlling the
economy than the States themselves.
This must make us reflect not just on
the fact that the future of the economy
is unpredictable and that now is not
the time to be swayed by those who
believe they know what will happen,
but also and especially on the fact that
there is no guarantee that violent crises
or dangerous speculative bubbles
may occur, even quite soon. Economic
recovery should be verified over time
and not claimed just because there
happens to be an improvement in
things today. At this precise moment
in time, the Euro will go wherever the
wind takes it, just like a boat on the
sea. Let’s hope that the various governments
introduce the right financial
instruments to avoid more fluctuations
like those seen in recent months.
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