The Rise of the Dollar

February 9, 2015

In the last 8 months (since May 2014) the dollar gained more than 20% of its value comparing to the euro, staying just bellow the 0.9 border. It is not just about the troubles in Europe - deflation, nonexistent economy growth, uncertainty about Syriza's victory in Greece, the Ukraine crisis - the US Dollar index is up near 20% in the same period. And the US Dollar index is a "basket" of currencies, that, for instance, includes 57.6% of euro, 13.6% of Japanese yen and 11.9% of British pound sterling. So, the dollar is up against the euro, but has similar path of growth comparing to the yen and the pound, as well.

One US Dollar

Why is Dollar Rising?

The US economy is doing fine. Not spectacular, but it has a steady, moderate growth for some time now, and the analysts forecast that this growth will be about 3% in 2015. The unemployment rate, near 10% in 2009 and 2010, is now almost halved. When you have a country with stable and steady growing economy, that's something investors like (Not to mention when you have a country that is the biggest economy in the world. That helps, too.). The more investors - the stronger demand for the currency, in this case the dollar. And when you have the strong demand for just about everything, it's value is bound to go up. Of course, after years of, basically, printing money (a lot of money - trillions of dollars), the US Government and Fed did its share in strengthening of the dollar, by announcing in October that they are ending quantitative easing (QE) program, started back in 2008, when, due to the global financial crisis that started in the US, Fed used this monetary instrument to back down the falling economy. The decision from October 2014 meant the dollar won't be as cheap as it used to be.

Exchange Rate USDvsEUR (Photo Credit ECB)

The Situation in Europe

The European Union and the European Central Bank (ECB) took different path - austerity measures in number of countries (Greece, Italy, Spain, Portugal, Ireland...), in order to control their public debt and fiscal deficit. To soften these measures, the ECB lowered its interest rate, quickly bringing it near zero percent. After some time, in 2012, interest rate was zero, and then, in 2013, it became negative - that meant that you are paying money to keep it in the bank. All of these was made to bring down the still-too-strong Euro. But it didn't happen. There are some advantages when you have strong currency - you have low inflation, the import goods are cheaper, and generally, consumers have the feeling that they are wealthier. But, at the same time, your economy and your exporters are becoming less competitive, as your production per hour is more expensive than your neighbors'. For example, look at the Germany's car production while the eurois strong: for someone in the UK to buy a car coming out of Germany, it will take more pounds to convert in euros, making it more expensive. Or, look at the Switzerland: for more than three years, the Swiss franc was attached to the euro, with the exchange rate around 0.82 francs for euro. And then, the Swiss Central Bank said it's enough, and detached the franc from the euro. The franc rose 20% that day. To translate that, the average Swiss citizen that went across the border, in France or in Germany, could have bought 20% more goods for the same amount of francs than yesterday.

Next page: The Fear of Deflation

The Stock Market

The Fear of Deflation

Also, and that is a huge problem, Europe started to have deflationary tendencies. Deflation is the opposite of inflation - that means that tomorrow prices are going to be lower than today. And while this may sound appealing for consumers, this is devastating for economy. Why would I buy anything today, when tomorrow that same thing will be cheaper? Why would I produce anything, when I know that my product's price is just going to be lower and lower? Why would I invest into something, when its value will decrease in time? In December 2014, deflation in the eurozone was 0.2%, in January 2015 it was 0.6%. And in that same January, the ECB took measures that US had taken more than six years ago - they started printing money. Starting from March and up to September next year, the ECB will pump 60 billion euros per month into Europe's economy, and hope that will translate into the same results US had. Markets have been preparing for this QE for some time, and in anticipation the euro weakened. The announcement of QE itself resulted in 3.8% drop of the euro against the dollar, to its lowest level since August 2003.

Justine Smith
Justine Smith – Money Gun (Photo credit Justine Smith)

Who will Benefit

The ECB and the EU hope that this injection of cheap money into financial system will get economy going. And, while this may be favorable for Europe's exporters, industry and overall competitiveness, this probably will not translate good for European art collectors. Rare are those who will spend a lot of money buying artworks, knowing that their item will be worth less in the next period, although with the same price-tag: when the euro is falling, a thousand euros spent today will be less valuable tomorrow (Read here on art market and wealth management). Now, at least in this case, what's not good for European, it's brilliant for the art collectors from the US. Last May, you could have gotten 0.72 euros for one dollar. Today, you can get 0.88 - that's 22% more. And that means that an art collector from the US can buy 22% more for the same amount of dollars. If this trend continues - and it should, as the cheap money will flood the eurozone starting the next month - the purchase power of the American collectors will just grow and grow. If you live in the States, and if you were planning to acquire some piece of art (How do you collect art?), maybe it's time to take a trip to Europe.

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Art Market

Featured image: Jasper Johns - Flag, 1983 (Photo Credit Sotheby’s)