The situation in the euro zone has become so bleak that it is giving rise to the most improbable rumours. The latest to make the rounds of European hedge fund managers suggests that the euro will be tied to the dollar at close to parity, a dramatic fall from its current level of just under $1.30 and one that would involve the printing of hundreds of billions of euros.
However unlikely, the speculation is an indication of Europe’s plight in a world with little growth and every government looking at exports as a way to grow. A cheap currency giving an artificial boost to competitiveness is more palatable than austerity.
The euro remains relatively strong for a variety of reasons. Despite domestic tensions, Europeans are not taking their money out of Europe, they are just moving it to safer homes within the region. Moreover, European banks continue to sell off dollar assets and bring the proceeds home. In addition, central banks in emerging countries continue to hold the euro as something of a reserve currency.
Meanwhile, the Americans and Chinese prefer to see the euro remain strong since exporters on both sides of the Pacific compete against Europeans. To the extent that the euro does drop, pressure will increase on the Fed to consider another round of quantitative easing to keep the dollar relatively depressed.