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Economy

Why The Euro Is Starting To Resemble The Yen

The European single currency is emerging as the new global provider of liquidity to the international financial system.

Euros are replacing dollars
Euros are replacing dollars
Nessim Aït-Kacimi

-Analysis-

PARIS — The "Japanification" of the euro is happening. The European single currency is on its way to becoming the world's currency of global borrowing, changing its role and bringing it closer to that of the yen, according to George Saravelos, a top Deutsche Bank strategist. Foreign investors like sovereign wealth funds and central banks are not otherwise disposed to invest in Europe, given the poor attractivity of the bond market and dim perspectives of economic growth.

"The eurozone is emerging as the new global provider of liquidity to the international financial system, slowly replacing the dollar," says Saravelos. The internationalization of the European currency — its use on global markets — is the result of the low-interest rate policy that the European Central Bank (ECB) has been pursuing. For the first time, bond issues in euros by non-domestic companies have exceeded their issues in dollars. Companies are borrowing at lower interests in Europe than in the United States. This gap is even wider than during the 1999 dotcom bubble.

Europeans banks are supplying the rest of the world with cash.

Global hedge funds are borrowing euros at low cost, and sell afterwards to invest elsewhere (emerging markets, Asia, U.S.), and especially bond markets, which give higher yields in carry-trade operations. The European currency is financing a boost in worldwide risk-taking and is going to evolve in opposition to good healthy markets, becoming then a safe-haven currency.

In 2019, the euro ceded 2.1% to the dollar and 1.7% to the rest of the world. Since the beginning of the year, it's dropped 1.2% while stock markets have registered gains of 1% to 3%. If any concerns were to show up, the investors will sell risky assets and the European currency will go up.

According to the Deutsche Bank strategist, the European currency will grower even closer in behavior to the yen over time. That is to say gradual reductions and a low volatility when world markets are well-oriented, followed by sudden upturns when the investment situation turns negative. The volatility of the euro-dollar over a one-year span just hit an all-time low, showing that markets continue to have jitters about broader geopolitical tensions.

The speech by the German parliamentarian affects share prices at the stock exchange in Frankfurt Main, Germany, 29 Sep. 2011. — Photo: Frederik von Erichsen/DPA/ZUMA

Europeans banks are supplying the rest of the world with cash. They lend euros to those outside of the eurozone (banks, companies, institutions, etc.) at an unprecedented rhythm since 2007. The recent trimestral report of the Bank for International Settlements notes that European lenders appear to be encouraged to exchange this surplus of cash in euros to convert it in dollars through currency swaps contracts, whose activity has recently risen. This cash will then be invested in dollar-denominated assets like T-bonds.

European exporters getting their dollars back from their US sales prefer to leave their dollars in American bank safes, which leaves them far more valuable than taking it back right to Europe. And, it is clear, they will be even less apt to sell their dollars for euros if the ECB carries on with its low-rate policy.

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eyes on the U.S.

The Weight Of Trump's Indictment Will Test The Strength Of American Democracy

The U.S. legal system cannot simply run its course in a vacuum. Presidential politics, and democracy itself, are at stake in the coming weeks and months.

The Weight Of Trump's Indictment Will Test The Strength Of American Democracy

File photo of former U.S. President Donald Trump in Clyde, Ohio, in 2020.

Emma Shortis*

-Analysis-

Events often seem inevitable in hindsight. The indictment of former U.S. President Donald Trump on criminal charges has been a possibility since the start of his presidency – arguably, since close to the beginning of his career in New York real estate.

But until now, the potential consequences of such a cataclysmic development in American politics have been purely theoretical.

Today, after much build-up in the media, The New York Times reported that a Manhattan grand jury has voted to indict Trump and the Manhattan district attorney will now likely attempt to negotiate Trump’s surrender.

The indictment stems from a criminal investigation by the district attorney’s office into “hush money” payments made to the adult film star Stormy Daniels (through Trump’s attorney Michael Cohen), and whether they contravened electoral laws.

Trump also faces a swathe of other criminal investigations and civil suits, some of which may also result in state or federal charges. As he pursues another run for the presidency, Trump could simultaneously be dealing with multiple criminal cases and all the court appearances and frenzied media attention that will come with that.

These investigations and possible charges won’t prevent Trump from running or even serving as president again (though, as with everything in the U.S. legal system, it’s complicated).

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