Euro Drops to $1.05 as ECB Runs Out of Ammunition
The euro trades around $1.05 without rebounding after rate hikes. The ECB has exhausted its margin and its balance sheet accumulates losses if parity returns.
English · Original discussion in Spanish · Published
The euro drops to $1.05 as ECB runs out of ammunition
The euro trades around $1.05 and falls without the ECB's rate hike triggering even a hint of a rebound. Parity, that threshold crossed with difficulty a year ago, is once again within reach. This time, the central bank arrives with an empty magazine: it already bought European public debt when it was expensive, and now that debt is depreciating while yields rise. Each euro bought above parity becomes, if the exchange rate breaches it again, a book loss.
The diagnosis circulating in economic analysis these days is uncomfortable: the ECB can not only not support the currency, but its own balance sheet is the one exposed. The question is no longer whether the euro falls, but how long it takes to drag sovereign debt with it.
Why the euro does not rebound despite rate hikes
The most repeated argument is that money flies to the United States. If the Federal Reserve maintains its course toward 7%, which some banks are already putting on the table, the interest rate differential forces the ECB to move or watch as the euro sinks to $0.80. The logic is ruthless: with less remuneration, no one wants euros.
The problem is that Europe has a burden that no rate hike fixes. A weak euro should make exports cheaper, but if energy and raw materials are paid in dollars, the advantage evaporates before leaving the factory. German industry produces at skyrocketing costs to do it, besides, at half gas. Exporting more and faster at lower prices is not a strategy: it is rowing until the weather clears.
The ECB runs out of margin and with losses on the balance sheet
The central thesis is that the central bank is dry. It bought European public debt when it was expensive, and now that debt is worth less. If the euro falls below parity, these purchases translate into book losses. It is not a minor detail: a central bank with losses has less credibility to continue intervening.
Some argue that central banks never literally run out of money, but the argument hits the reality of the market: ammunition is not infinite if each shot widens the hole. Thursday's rate hike triggered not even a meager rally. That silence from the market says more than any statement.
Germany, energy, and the coming winter
The German axis underpins much of the pessimism. The war in Ukraine has been the final blow to an economy that was already struggling. Without cheap energy, industry loses competitiveness, and the country that supported the European architecture begins to stagger.
This is compounded by a cocktail that several analyses list without holding back: skyrocketing energy costs, an aging population, governments that act late and poorly, and an ECB that arrives at each decision with a limp. Monetary policy, they say, has always lagged behind events.
Stagflation, 6% debt, and the October phantom
The scenario that emerges is one of harsh stagflation: sticky inflation with flat growth. The most aggressive forecasts speak of letters and bonds at 6% and deposits at 7%. If that happens, the financing cost for families and businesses skyrockets, and credit dries up.
The question that looms is when it explodes. Some point to October, others delay the explosion to 2024 or even January 2025. No one has the date, but almost all agree that the setup has structural design flaws. No monetary union has ever worked without a fiscal union behind it.
What Europe sells and what the euro is really worth
The strongest argument is not about interest rates, but about production. The value of a currency depends on what can be bought with it, and in Europe, what is produced has been disappearing. What do we sell that interests other countries? What do those who sell us raw materials or manufactured goods get in return? That is the real value of the euro, and the ECB does not fix it.
Meanwhile, at the supermarket checkout, faces are pitiful. Society endures a consumption pace that can no longer be sustained. Oil rises, the euro falls, and the feeling is one of poverty that sets things back.
How long does it take for a central bank to admit that it no longer controls its own currency?
The euro trades around $1.05 and falls without the ECB's rate hike triggering even a hint of a rebound. Parity, that threshold crossed with difficulty a year ago, is once again within reach. This time, the central bank arrives with an empty magazine: it already bought European public debt when it was expensive, and now that debt is depreciating while yields rise. Each euro bought above parity becomes, if the exchange rate breaches it again, a book loss.
The diagnosis circulating in economic analysis these days is uncomfortable: the ECB can not only not support the currency, but its own balance sheet is the one exposed. The question is no longer whether the euro falls, but how long it takes to drag sovereign debt with it.
Why the euro does not rebound despite rate hikes
The most repeated argument is that money flies to the United States. If the Federal Reserve maintains its course toward 7%, which some banks are already putting on the table, the interest rate differential forces the ECB to move or watch as the euro sinks to $0.80. The logic is ruthless: with less remuneration, no one wants euros.
The problem is that Europe has a burden that no rate hike fixes. A weak euro should make exports cheaper, but if energy and raw materials are paid in dollars, the advantage evaporates before leaving the factory. German industry produces at skyrocketing costs to do it, besides, at half gas. Exporting more and faster at lower prices is not a strategy: it is rowing until the weather clears.
The ECB runs out of margin and with losses on the balance sheet
The central thesis is that the central bank is dry. It bought European public debt when it was expensive, and now that debt is worth less. If the euro falls below parity, these purchases translate into book losses. It is not a minor detail: a central bank with losses has less credibility to continue intervening.
Some argue that central banks never literally run out of money, but the argument hits the reality of the market: ammunition is not infinite if each shot widens the hole. Thursday's rate hike triggered not even a meager rally. That silence from the market says more than any statement.
Germany, energy, and the coming winter
The German axis underpins much of the pessimism. The war in Ukraine has been the final blow to an economy that was already struggling. Without cheap energy, industry loses competitiveness, and the country that supported the European architecture begins to stagger.
This is compounded by a cocktail that several analyses list without holding back: skyrocketing energy costs, an aging population, governments that act late and poorly, and an ECB that arrives at each decision with a limp. Monetary policy, they say, has always lagged behind events.
Stagflation, 6% debt, and the October phantom
The scenario that emerges is one of harsh stagflation: sticky inflation with flat growth. The most aggressive forecasts speak of letters and bonds at 6% and deposits at 7%. If that happens, the financing cost for families and businesses skyrockets, and credit dries up.
The question that looms is when it explodes. Some point to October, others delay the explosion to 2024 or even January 2025. No one has the date, but almost all agree that the setup has structural design flaws. No monetary union has ever worked without a fiscal union behind it.
What Europe sells and what the euro is really worth
The strongest argument is not about interest rates, but about production. The value of a currency depends on what can be bought with it, and in Europe, what is produced has been disappearing. What do we sell that interests other countries? What do those who sell us raw materials or manufactured goods get in return? That is the real value of the euro, and the ECB does not fix it.
Meanwhile, at the supermarket checkout, faces are pitiful. Society endures a consumption pace that can no longer be sustained. Oil rises, the euro falls, and the feeling is one of poverty that sets things back.
How long does it take for a central bank to admit that it no longer controls its own currency?
Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (144 replies).
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