Since its effective entry into force in 2002, the euro has almost continuously made an unstoppable ride on the dollar. The single currency has steadily risen from historic lows, below parity around the quota 0,80, up to the pre-crisis highs, when the European ticket reached its absolute peak, touching altitude dollars 1,60.
The following years were more troubled: starting from 2008 the financial crisis triggered large exchange rate depreciations, which twice saw the euro lose its 20% of its value against the greenback. According to the classification by Jeffrey Frankel and Andrew Rose, which sets the annual depreciation threshold at 25% which triggers the classification of "currency crisis“, the euro in 2008 and 2010 came very close. Instead, it would have fallen flat according to Carmen Reinhardt and Kenneth Rogoff, who lower the threshold to 15%.
Today, once again, we are observing a rapid depreciation of the single currency, which since the beginning of 2012 has lost the 13% on the US dollar, settling around at altitude 1,27.
The collapse of the euro in recent weeks represents a valid thermometer of the European economic and political situation, he asks questions but it also delivers opportunity. First, from a technical point of view, risk flight involves an appreciation of the currencies in which foreign assets are denominated, purchased for shelter from European financial tensions. This is especially the case with the dollar and the Swiss franc, which even stand undermining gold in the safe haven race.
But how does the exchange rate affect the choices of savers and companies?
Taking advantage of swings can be very lucrative, but also very risky. In fact, in correspondence with a run on safe-haven assets, fixed-income securities record returns ever lower. This is the case with American or Swiss treasury bills. But in correspondence with lowest interest rates - And negative if you take into account inflation – buying them is essentially equivalent to buying currency. Today that may seem like a bargain, since the continued appreciation of the dollar foreshadows a potentially profitable future conversion to the euro.
An example: invest 100 thousand euros into a dollar-denominated bond, which makes the1,5% per year, upon maturity, will render, if the current exchange rates remain unchanged, one thousand five hundred euros. A low yield, which moreover does not cover the loss of purchasing power of the currency. But that shelters sufficiently from risk of a fall of the euro.
But the exchange rate is susceptible to considerable fluctuations in the short and long term, and the father of a family who wants to invest his savings in the operation described above should be willing to undergo a significant exchange risk: those 100 thousand euros, if the European situation improves significantly and the euro appreciates, for example, up to 1,31 dollars, at the time of expiry it would take home only 98.400 euros: a loss 1,6% nominal, and 3,6% in real terms, assuming an inflation rate of 2% per annum.
As regards raw materials, which are quoted in dollars, they can represent a good investment: buying them is equivalent, in a certain sense, to buying dollars. The expected appreciation of the greenback, however, must in this case be accompanied by forecasts on the price of the commodity.
In summary, in the purchase of foreign assets the expected exchange rate is a decisive factor, and in the case of companies it is important to protect yourself from the exchange risk by stipulating "forward" contracts, which allow you to "lock" in the present, for example, the cost of supplies and services that you intend to incur in the future, but at the current euro-dollar exchange rate. Or adopt other hedging mechanisms.
On the side of the real economy, the depreciation of the euro could in theory outline a competitive advantage for European exports. But, in this historical phase, it is difficult for this to happen: since the Eurodollar exchange rate constitutes a index of the macroeconomic performance of the two currency areas, the devaluation of the single currency photographs the deterioration of the economic conditions of the European countries. Therefore, in the short term it will be difficult for exporting companies to derive great benefits from the devalued exchange rate. First, the latter involves a cost increase for raw materials inputs to production, quoted in dollars. Secondly, the flight of capital from Europe in view of the safer overseas shores makes access to credit more onerous, the interbank market less fluid, with cascading consequences on the supply costs of companies.
It is in the long period, instead, that one euro around the equality it would benefit – and not a little – European producers. In the pre-crisis years, the very strong appreciation of the single currency against the dollar, caused by increasingly massive US trade balance deficitshas gradually eroded the competitiveness of our exports on a currency basis.
A “deleveraging” trend among American households, previously burdened by a level of private debt that would be difficult to replicate in the future, could stabilize the dollar at more realistic levels than the astronomical 1,60 reached in 2008. An exchange rate eur/usd “ fair value” that fluctuates between 1,15 and 1,25 it could be more than a mirage in the not too distant future.
Finally, the return to normal monetary policy management by the Federal Reserve and the ECB could stabilize the situation.
