How the euro becomes expensive

How the euro becomes expensive

• The exchange rate of the euro has recently dropped significantly.

• Above all, the possible economic effects of the Corona virus burden the common currency.

How the euro becomes expensive

What happens behind the windows on the third floor of 10 Mount Street Lower in Dublin can hardly be guessed from the outside. A golden knob shines on the dark front door, behind it a chandelier can be guessed through the skylight. Little else spills out at the headquarters of the hedge fund Alder Capital. The gentlemen of money like to be discreet.

If you believe the scarce data that Alder recently disclosed, some hedge fund calculators bet in January on a fall of the euro. In February, many hedge funds even launched such bets against the common currency. According to the latest data from the American stock exchange regulator CFTC, many are currently betting on a fall in the euro. And we have just 21.5 billion euros in the fire.

The money guild seems to be getting it right for the time being, because since the beginning of February at the latest, the euro against the dollar has been like a slide down. At the beginning of the year there was still $ 1.12 for a euro, but then it only went downhill. The motto of the motto: A little less every day. In the meantime, you can only get $ 1.08 for one euro. “Times for the euro remain difficult,” says currency expert Ulrich Leuchtmann from Commerzbank.

“Politically, the situation in the CDU must make the euro worry.”

For foreign exchange traders, what sounds like decimal places is a lot. In the meantime, the common currency was at its lowest level since 2017. For consumers, it’s all about cash: whether you’re planning a vacation abroad, trading stocks or standing at the gas pump. The currency traders had actually anticipated a yawning boring 2020. Special indices show which fluctuations the traders expect in the coming months. The pulse on the foreign exchange market? It hardly seemed to exist at the turn of the year. Now it is becoming increasingly clear that it was probably the calm before the storm.

© Jessy Asmus
A weak euro makes vacationing in the US more expensive, like here in California, on the beach in Santa Monica.

Four reasons are causing the euro to slide so rapidly these days: First, new political uncertainties startled many investors. In Ireland, Prime Minister Leo Varadkar resigned, in Germany the Thuringian crisis spilled over to federal politics. “Politically, the situation in the CDU must make the euro worry,” says currency trader Christian Eggers from Hamburg Commercial Bank. In other words, some investors are getting too hot politically in the euro zone.

Dax benefits from the weak euro

However, the corona virus is far more important. If, as a result of the virus, uncertainty about the further economic situation is rampant, investors traditionally take refuge in supposedly safe havens. In such shock phases, the global currency, the dollar, wins in particular on the foreign exchange market. Investors are pushing the dollar up as if on a seesaw, while the euro is under pressure on the other side. In the financial industry, they are well aware that Europe is significantly more dependent on the Chinese economy than that of the United States.

While German exports to China account for around three percent of the country’s economic output, US exports to China represent just under one percent of the country’s economic power – as the BNY Mellon figures show. “So we Europeans are much more dependent,” says foreign exchange expert Daniel Winkler from Metzler Bank. For financial experts, the consequence is clear: They are fleeing the single currency.

This also has consequences for consumers in Germany. Customers can feel it at the petrol pump every morning, for example, when looking at the fuel prices. The gasoline price rose again in the past week because oil purchases for European raw material groups are now becoming more expensive on the world market. Oil traders usually do their energy trading in the US currency – and for a dollar, Europeans now have to spend more euros. “The weak euro is having an effect,” says Germany’s largest automobile club, the ADAC. The average price for a liter of Super E10 rose by 2.5 cents in the past week alone.

In turn, shareholders can look forward to. In stock market reports, it has almost become a phrase that the weak euro is pushing the Dax. But it is not surprising that the weaker the European currency, the cheaper foreign companies can buy local products. An analysis by Commerzbank shows that almost all shares in the leading German index Dax are likely to benefit from a weaker euro – but most strongly the titles of the medical technology manufacturer Fresenius, the car companies BMW and Daimler and the semiconductor company Infineon. “This is a small boost to the economy,” says Commerzbank expert Leuchtmann.

Most of the time, however, only works for a short time. Some holidaymakers, on the other hand, should feel bad about the weak euro. Whoever goes on vacation in the USA, for example, now has to pay more. And the euro has also lost against many other currencies such as the Canadian dollar, the Turkish lira and the British pound since the turn of the year.

However, many experts expect the common currency to appreciate somewhat against the dollar towards the middle of the year. Those who agree with this view and still have to settle a hotel bill for the summer can theoretically wait a few more weeks and speculate on a better rate. This way, private investors can also make their very own currency bet.

The hedge fund managers at Alder Capital apparently made almost three percent returns on all their euro bets in January. However, this should bring a tangible neighborhood conflict to the Irish: Because the direct neighbor of the lords of money in downtown Dublin has been calculated – the local representation of the EU Commission.


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