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Given the faster money creation in the United States than in the Eurozone, the growing external debt in the United States and the return to external assets in the Eurozone and the prospect of the creation of a Eurozone federal debt, it is logical to expect a marked appreciation of the euro against the dollar in the longer-term, according to economists at Natixis. 

Key quotes

“The monetary approach to the exchange rate shows that the country where the money supply grows faster sees a depreciation of its exchange rate. There has been a faster rise in the monetary base (in central bank money) in the United States than in the Eurozone in the recent period due to the COVID crisis.”

“The United States’ shortfall in savings and its external deficit come up against the euro zone’s excess savings and external surplus. This has resulted in the United States’ growing net external debt and the return to net external assets for the Eurozone, i.e. a situation of excess supply of dollars and excess demand for euros, which is conducive to an appreciation of the euro against the dollar.”

“The historical trend is indeed that of a gradual introduction of federal debt in the Eurozone, which first finances investments in the European Union’s recovery plan and then broadens to finance the energy transition, investments for the future, etc. Euro-zone federal debt would be attractive, and investors would switch from US debt to this euro-zone federal debt, due to an increase in the euro’s weight in foreign exchange reserves, which would obviously be positive for an appreciation of the euro.”

“This reasosing obviously rules out the emergence of a serious political crisis in the Eurozone that would threaten a break-up of the Eurozone and drive investors to switch to the dollar, as we saw from 2010 to 2014.”