Europe Is Desperate And US Dollar Strengthens

by: John M. Mason

The European Central Bank has lowered the amount of securities it will be buying each month as a part of its quantitative easing, but it has extended the time period.

The value of the Euro against the US dollar has dropped dramatically because of this move.

Facing the reality of a strong US dollar against the Euro and against other major currencies, US policy makers may have to reconsider the role of the dollar in policymaking.

The headlines of the Financial Times tells the story: "ECB prolongs QE But At Lower Level Of €60bn A Month."

That is, the European Central Bank, at its latest meeting which ended yesterday, continued to pursue its quantitative easing exercise, in fact extended the time that its quantitative easing will exist, but it lowered the amount of securities it would buy each month to €60 billion from €80 billion.

The point is that the economies of the eurozone are still suffering to the extent that additional stimulus is still needed. Thus, the period of QE will be extended from the end of March 2017 to the end of the year 2017.

However, in extending the time period of QE, Mario Draghi, the president of the ECB, indicated that the amount of purchases taking place each month would drop. However, reducing the amount of ECB purchases every month should not, Mr. Draghi insisted, be considered to represent a tapering off of the quantitative easing, but represents a QE "trim" and not a taper.

Mr. Draghi seemed to want to assure the financial markets that, as of this date, quantitative easing is not coming to an end. Just the monthly amount purchased is being cut back.

The immediate market reaction to this extension of a trimmed amount of ECB purchases was a decline in the value of the Euro.

This is all important to the European policymakers because the foundation stone of the effort to get European economies growing at a faster pace has been the value of the Euro.

As late as early May 2014, it took just under $1.40 to acquire one Euro.

On Friday, December 9 2016 at around 12:30 pm EST in the United States, it took slightly less than $1.0540 to purchase one Euro. At the close the price was around $1.0560.

This represents an almost 25 percent decline in the value of the Euro against the US dollar!

To me, this is a sign of desperation on the part of the Europeans.

As far as the United States is concerned, participants in the financial markets have seemed to be almost crying for the value of the US dollar to rise…not only against the Euro, but against most other currencies.

Here is just one example of a situation in which financial market participants appeared to want a rise in the value of the dollar. And, a stronger dollar is something that I have supported for a long time. However, the Federal Reserve did not raise the rate at this time.

In fact, Federal Reserve officials have never argued, up to this point, for a stronger US dollar.

The important thing about the current market move is that it may force the Federal Reserve…and the incoming Trump administration…to take another look at their monetary and fiscal policy efforts for the future.

This may be the dawning age of a new policy approach, a policy approach that actually supports a strong US currency, although supporting a strong dollar is not a part of the mandate given the Federal Reserve by Congress.

US policy makers have stated since the early 1960s that a strong United States dollar was a goal of the government. However, the actual policies followed forced the United States off the gold standard created at the end of the Second World War and then resulted in the value of the US dollar being floated.

As a consequence, from the beginning of 1973, through until April 2011, the value of the US dollar fell by almost 37 percent against a group of major currencies in the world.

Now, the tables are turned. The value of the dollar is rising and it is because the currencies of other nations are so weak…not because the US has tried to achieve a stronger dollar.

And, this situation does not seem to want to go away any time soon.

This may force the United States government to re-evaluate its policies and include within its strategies actual efforts to of achieve and maintain a strong US dollar.

And, without taking any time to explain the details, this re-evaluation is consistent with economic policies that will aim at returning people to the work force and improving the growth rate of labor productivity. It is consistent with developing programs that work on the supply-side of the economy and not just on the demand side.

It is my belief that the value of the US dollar will continue to rise against the Euro, especially given the current stance of the European Central Bank.

I firmly believe that these two currencies will trade one-for-one in the near future and may even go lower.

This will force the United States government to consider new programs and policies that will improve the productivity of American labor and help the US keep capital more fully employed and result in America's products being more competitive in the world. These are all important objectives for US citizens as was expressed in the most recent presidential election.

It is a new era that requires new thinking and new approaches to achieving goals.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.