Menu Close
Posted in Taken Down

Exogenous shock from artificially high euro

This is a syndicated repost courtesy of Sober Look. To view original, click here. Reposted with permission.

For the first time the ECB has admitted that disinflationary pressures present a problem for the central bank. Draghi is blaming the downward pressures on prices in the Eurozone on the unusually strong euro.

WSJ: – “The strengthening of the effective euro exchange over the past one-and-a-half years has certainly had a significant impact on our low rate of inflation and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability,” Mr. Draghi said Thursday in a speech in Vienna.

Indeed the euro has been strengthening beyond most analysts’ expectations.

EUR/USD (source:

The euro’s lofty levels, combined with softening demand from China (see post), is creating headwinds for the euro area. Part of the problem is that a good portion of the Eurozone’s recovery has been driven by exports rather than domestic demand. Moreover, the yen’s relative weakness is not helping matters, as Japanese exporters have a pricing advantage over Germany.

The confluence of the euro’s strength and weak domestic demand is exacerbating disinflationary risks in the Eurozone – as seen in today’s German CPI number.


Ironically some of the euro rally is rumored to be the result of China’s rebalancing its FX reserves toward the euro, trying to diversify out of the US dollar.

CNBC: – “While the technical outlook and European domestic fundamentals look quite shaky for the single currency right now, there could be one external factor that may help to prop up the single currency in the face of these challenges: China,” said Kathleen Brooks, research director at

The timing for Draghi is terrible. The ECB has been arguing for some time now that disinflation in the area is transient. But this artificial euro strength could be creating an exogenous shock, potentially dampening the area’s nascent recovery and putting further downward pressure on prices.

From our sponsor:

Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

Related Posts

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.