Dollar Lure – The Euro Is Not Getting Weak, It Has Simply Never Really Been Strong.

The utopia of the euro seems to be overtaken by the reality of the world.

Without gas, without oil, without Mario Draghi's legendary “Whatever it takes”, the euro has been dropping the mask since the beginning of 2022. And we must admit that it is not a pretty sight!

The conditions of the euro currency's existence are beyond the incorrigible exuberance of the markets. Nevertheless, the extreme sensitivity of the currency to the contingency of events raises questions.

What if the euro currency had been adorned with peacock feathers from the start? What if the utopia had abused the concealment of our ignorance since January 1, 1999? How to explain such a disenchantment of investors other than by the feeling of having been duped? Hence the doubt, and the necessary Hegelian question: what if the euro was only a ruse of economic reason?

The market economist's answer

To answer this question, we must first reject the following answer: “it is not the euro that is falling, it is the dollar that is rising”.

Above all, we must not fall into the trap of the market economist who refutes the accusation of a weak euro and prefers the accusation of a strong dollar. The dollar is appreciating against all currencies: this is a true and verifiable fact. But we don't care. If it is a question of knowing who is going up and who is going down, no need for analysis, the eyes are enough.

In his defense, the market economist will invoke Ockham's razor, which always prefers the simplest explanation; and it is indeed simpler to explain the weakness of all currencies by the strength of one (the dollar). But simpler is not truer, it is just simpler.

The fundamental cornucopia

Nor will we look for the fundamental cornucopia, the one that proposes as many intrinsic values of currencies as possible at market levels. Let's be charitable, many models are nobler than others, inspired by theoretical literature or simple common sense.

And it is true that today, currencies have never seemed so out of step with the levels suggested by these models. But, history also teaches us that it is very difficult to convince an investor to bring a currency back to its senses:

“The euro is too weak? Shoot, let's buy it back ... uh later.”

These calls to order operate, certainly, but over horizons that do not interest the market weathervane, the one that buys today what it will sell tomorrow. Thus, in the long run, currencies are indeed returning to levels compatible with the sustainability of current accounts and/or potential GDP trajectories. But “in the long run” is a horizon that can be as close as eternity, and eternity is long (especially near the end - Woody Allen).

The surjective euro

Finally, we won't go looking for the occult sciences either, those that show a fascination for magic numbers: the parity of the euro-dollar, 1 for 1, which can evoke the “eye for an eye, tooth for a tooth”. As if there were a good and a bad side to the euro-dollar coin: above 1 is good, below 1 is bad.

The Gödelite investor is convinced that the truth lies in the number.

Once again, let's be charitable, there is more to the necromancer investor's reasoning than meets the eye. Indeed, the fact that the euro is threatening to fall (has fallen just for a moment) below the level of 1 against the dollar has many practical consequences: before, we exchanged 1 euro for 1 dollar and a few cents, tomorrow we will exchange 1 dollar for 1 euro and a few cents.

The balance of power is reversed, and so is the relationship: the euro was injective, it becomes surjective: for each dollar, there is at least 1 euro to exchange.

The Hegelian thesis

So let's dig elsewhere at the risk of getting lost. No truthfulness, just curiosity. Perhaps the weakness of the euro against the dollar is not due to the strength of the dollar but to the weakness of the euro?

As I write these words, I realize how stupid the statement may sound: if the swing leans to one side, it is as well because one is too heavy and the other too light. But let's dig in anyway. Perhaps this weakness of the euro has not yet revealed all its symptoms, because the investor has not yet realized what the Covid and Ukrainian crises have revealed to him: a eurozone whose tickling future was far too dependent on the goodwill of the world outside the euro.

We imagined a world without conflict, without viruses, without the caprice of fate, ensuring the smooth flow of goods, raw materials, capital, and ideas (preferably the same ones).

Certainly, the eurozone would no longer have had to worry about these lowly material considerations and would have been able to project itself towards better living together. And what better quality label than the launch of a common currency to seal the pact. Seen from this angle, the euro looks like a ruse of economic reason, its mere existence being sufficient to guarantee the good health of the beast: the eurozone could exist because the euro currency existed.

But the good intentions of the participants are not always enough to move in a good common direction.

Sometimes the whole is less than the sum of its parts. Sometimes the whole is just a heap, to paraphrase Régis Debray. In truth, it may be that the euro has not become weak, but rather that it was never strong. After all, this is nothing new. Mario Draghi had already let the cat out of the bag by announcing that the euro was like a bumblebee:

“It can't fly, but it flies.”