The euro is tumbling against the dollar. Actually, almost every currency is tumbling against the dollar. I know falling currencies sound bad, but this will actually help Europe’s recovery while slowing down the US economy. Why? Because everything exported from Europe is now cheaper.
Exports make up a huge chunk of Europe’s GDP, more than a quarter. That’s twice as high as the United States’ proportion and even more than export-heavy China. And the weaker euro makes anything produced in the eurozone cheaper abroad: French and Italian cars, German machine tools and Irish drugs will now be cheaper around the world, boosting those exporters.
According to Credit Suisse – a 10% year-on-year fall in the trade weighted currency should raise GDP growth by 0.7%.
Simply put, US companies are worse off because European goods are now less expensive and our strong dollar makes US goods more expensive. Soon, the dollar will be worth more than the Euro.
Now a strong dollar is good for anyone who’s planning a trip overseas, but it’s bad news for anyone who’s planning on selling stuff there. That’s why stocks fell, with the S&P 500 down 1.7 percent on the day and now negative on the year, as multinationals that depend on foreign sales took another hit. After all, it’s not just the euro that’s falling against the dollar, but almost every other currency in the world, too — with Turkey and South Africa’s falling more than most on Tuesday.
I won’t get into quantitative easing, but there is your finance lesson for the day.
[Business Insider] [Washington Post]