The euro hit a 12-year low vs the dollar Wednesday, continuing a dramatic slump for the single currency. It’s the biggest story in the financial markets today (so far at least) so here are three things you need to know about the tumbling Euro:
#1: The dollar bears were dead wrong. The dollar hasn’t just rallied vs the euro…it’s on a tear vs. almost every other major currency. The lesson here: folks like Glenn Beck, Peter Schiff and many others who implored you to dump your dollars, stock up on canned goods and buy gold are just modern day snake oil salesman — they also have a political ax to grind vs. an economic one. The hard core dollar bears weren’t just concerned about ‘Helicopter Ben’ they also believe President Obama was a foreign-born, Muslim socialist (or worse, a Commie!) bent on destroying the greenback..and the American way of life.
(Update: A spokesman for Peter Schiff responded to the above, writing: “[Peter] says that Obama is a socialist…but he calls all democrats, and a good portion of republicans, socialists. There is nothing special about Obama on that front. He never said anything about Obama being foreign born or a Muslim, or bent on purposely destroying America or its way of life. He does believe that big government policies and central bank activism will destroy the country, but not because the policy makers want that outcome, but because they simply don’t understand the consequences of their actions.”)
#2 European Central Bank President Mario Draghi is a master manipulator. In June 2012, Draghi famously said he’d do “whatever it takes” to save the single currency. Talk may be cheap but that actually bought the ECB two-and-a-half years to think about, plan and (finally) push forward with a quantitative easing program. On Wednesday, Draghi said QE is working and having a “beneficial impact” and starting to affect the real economy in Europe. Amazing! The program only started on Monday — three days ago — and Draghi is already declaring victory.
As evidence, the ECB chief cited “the so-called surprise index that compares actual macroeconomic data with consensus estimates of market analysts.”
In other words, sentiment about Europe’s economy got so bad that recent “green sprouts” look like tall timber – at least that’s what Mario Draghi wants you to believe.
#3 Janet Yellen is watching. If Janet Yellen were to take a page from Draghi’s book Jawbone: How to move markets without actually doing anything, she’ll remove the “patience” language from the Fed statement next week and allow subordinates like St. Louis Fed President James Bullard to continue talk about the need to raise rates…but not actually do anything until late 2015 at the earliest.
Yellen remains rightfully concerned about lackluster U.S. wage growth and that ‘official’ inflation rates around the global remain well below 2%. Despite improvement in the U.S. economy, notably on the jobs front, Yellen likely agrees with Jason Furman, chair of the White House Council of Economic Advisers, who writes “there is more to do” to help middle class Americans in today’s WSJ.
Oh, and the Fed chair has got to be concerned about how just mere speculation of a Fed rate hike has sent the dollar soaring, especially given that 23 other central banks have eased monetary policy this year. The notion that Fed will be going against the global monetary policy grain and raise rates is spooking the stock market because a strong dollar makes it harder for U.S. multinationals to compete with international rivals and higher interest rates pose competition for stocks generally.
(As an aside, the euro’s weakness and signs of life in the EU are prime reasons why a lot of savvy investors like George Soros and Warren Buffett have been making bets on Europe, based on recent 13-F filings.)
Finally a bonus thing to know: The euro hasn’t been this cheap in 12 years and seems almost certain to hit parity with the buck by Labor Day. That means now is a great time to book your dream vacation to Europe as the dollar will go a lot further across the pond than it did six or 12 months ago. The only downside, there will be a lot of other Americans in Europe this summer.
And, yes, I know that’s four reasons but I get paid in dollars so am feeling flush today.
Source: Yahoo! Finance (finance.yahoo.com)