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Macroscope | With European economies mired in recession, is the euro living on borrowed time?

  • The rebound in the euro is simply the flip side of the US dollar being undermined by uncertainty about the presidential election. The monetary muddle in Europe won’t help the currency after the dust settles in America

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Symbols for the euro and US dollar at currency exchange booths in Tsim Sha Tsui, Hong Kong. Photo: Sam Tsang

Given the way the euro has been rallying in the foreign exchange markets over the past three months, you would be forgiven for thinking the currency has become a beacon of stability in uncertain times. You couldn’t be further from the truth.

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The rebound in the euro is simply the flip side of the US dollar being undermined by growing uncertainty about the upcoming US presidential election in November and how the US authorities are coping with the coronavirus crisis. Global investors are simply taking time out from long dollar exposures, and euro bulls are simply filling a temporary void. It won’t last long.

The euro is living on borrowed time and the deepening monetary muddle in Europe won’t help the currency once the dust settles on the US elections. The euro looks overvalued and a prime target for an ambush later this year. 
Europe’s monetary pacesetter, the European Central Bank, seems to be fighting a losing battle, struggling to keep the European economy from slipping into a deeper recession. The more policy stimulus the ECB throws into the ring, the greater the damage to its monetary reputation, and to little avail so far.

Despite close to 3 trillion euros of assets purchased so far under the ECB’s quantitative easing programme and interest rates steeped in negative territory, the economy of Europe is showing precious few signs of a return to normality.

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Europe’s three biggest economies, Germany, France and Italy, are all stuck in recession with little chance of output reaching pre-pandemic levels until 2022. Rumblings about throwing too much good money after bad are no surprise. The ECB’s defence is that it has no alternative, otherwise Europe might suffer an even worse fate.
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