You spend years developing and structuring a single European currency. You take care mandating the terms and conditions for entry. You reject unworthy applicants. You launch with great success. You become the key alternative choice for settlement of international claims and central bank reserves.
Fait accompli.
But can there be too much of a good thing in terms of success for the euro?
Recent comments from eurozone finance ministers might suggest so.
The single currency has, after all, appreciated 4.35 per cent against the dollar this year, causing a clear level of discomfort for Europe’s export-based economy.
And it seems, the eurozone might just have had enough of weathering everyone else’s currency depreciation.
As Reuters reported on Thursday (our emphasis):
GOTHENBURG, Sweden, Oct. 1 (Reuters) – Euro zone officials complained on Thursday of too much volatility in currency markets after a wide-ranging discussion on exchange rates to prepare a message they will take to G7 talks in Istanbul. The regular meetings of G7 finance ministers and central bankers usually include a discussion on currency policy and the comments from European officials left little doubt that it is a subject they want to keep on the agenda in Turkey this weekend.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia told Reuters Thursday’s meeting of Eurogroup officials would prepare a joint position for the G7. “Well, recently the euro has appreciated and we will prepare also the position of the euro area (on this) vis a vis the next summit, the next meeting of the G7 in Istanbul,” he said.
European Central Bank President Jean-Claude Trichet, who will also attend the G7, speaking after the meeting said too much movement in foreign exchange markets was a bad thing. “There is a very strong sentiment that we have a shared interest in a strong and stable international financial system, that excessive volatility and disorderly movement in exchange rates has adverse implications for economic and financial stability,” he said.
The problem with strategic currency intervention, though, is that everyone else is at the same game. Note, for example, the Swiss who have been actively protecting the franc from the SFR1.53 level against the euro since March this year.
Quantitative easing in the UK and US, meanwhile, can also be seen as meaningful participation in the devaluation game.
Unfortunately though, the more entrants the less likely the success rate. As Barcap’s forex team notes regarding Wednesday’s suspected intervention by the Swiss National Bank (our emphasis):
The smaller move in the Swiss franc yesterday compared to previous intervention days has raised the question of whether these interventions are becoming less efficient. While we do not know the amounts involved in yesterday’s intervention, this is certainly possible since the “surprise” element from the first intervention in March is much smaller now. Positioning may be another reason – long CHF speculative positions were arguably larger in March, when investors were very bearish risky assets, than in June or September – making the impact of the first intervention larger. But it is important not to interpret reduced efficiency as the SNB being less successful in its intervention – the efficiency of interventions was always likely to fall after the first one. But the Swiss franc has remained very stable and not appreciated significantly – which has been the SNB’s stated intention. We expect this stability in the CHF (especially against the euro) to continue at least until the end of this year as deflation is likely to persist until then.
Related links:
Musings on an overvalued euro – FT Alphaville
On your marks, get set, devalue - FT Alphaville