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Is it the Euro sinking or the US dollar rising? The U.S. dollar has been gaining a lot of value over the past couple of quarters - enough so to call into questi

Is it the Euro sinking or the US dollar rising? The U.S. dollar has been gaining a lot of value over the past couple of quarters - enough so to call into question whether inflation is being caused by currency policy, as the Federal Reserve believes, or being caused by actual supply constraints - as I and several other economists believe (but I'm not an economist). The fact the dollar is rising in value and yet prices have still continued to rise tells me the problem is supply. Supply shortages are something Western policy makers haven't had to contend with for quite some tine, certainly not in the lifetime of the policy makers!

revnode 4y ago
Europe simply printed more money than the US. Same for everyone else.
- s1artibartfast 4y ago
  I find that hard to believe. Do you have a reference? My understanding that the US stimulus was generally unparalleled
  - misja111 4y ago
    You're right, US has printed much more money. The EU is catching up though. In 2021, EU total amount of quantitative easing was 2.947 trillion euro's. https://en.wikipedia.org/wiki/European_Central_Bank#Low_inflation_and_quantitative_easing_(2015%E2%80%932019) https://en.wikipedia.org/wiki/European_Central_Bank#Low_infl... US: $4.5 trillion https://en.wikipedia.org/wiki/Quantitative_easing#:~:text=The%20Federal%20Reserve%20began%20conducting,to%20the%20COVID%2D19%20pandemic https://en.wikipedia.org/wiki/Quantitative_easing#:~:text=Th....
    - mardifoufs 4y ago
      That's just for 2021 though.
      - s1artibartfast 4y ago
        I think 2020 was even more
      - mathiasgredal 4y ago
        The cumulative numbers as of right now: EU: 3.4 trillion euro (https://www.ecb.europa.eu/mopo/pdf/APP_cumulative_net_purchases_by_programme.png?okju https://www.ecb.europa.eu/mopo/pdf/APP_cumulative_net_purcha...) US: 8.9 trillion usd (https://www.statista.com/statistics/1121416/quantitative-easing-fed-balance-sheet-coronavirus/ https://www.statista.com/statistics/1121416/quantitative-eas...)
    - mrep 4y ago
      I'd say the eurozone is winning in what matters: 3 trillion euros / ≈14.5 trillion euro gdp of the eurozone ≈ 20.6% of gdp 4.5 trillion USD / ≈23 trillion US gdp ≈ 19.5% of gdp
balderdash 4y ago
The dollar is strengthening, you can look at the dollar index [1] which compares the dollar to a basket of developed market currencies [2] [1]https://en.m.wikipedia.org/wiki/U.S._Dollar_Index https://en.m.wikipedia.org/wiki/U.S._Dollar_Index [2] https://www.wsj.com/market-data/quotes/index/DXY/ https://www.wsj.com/market-data/quotes/index/DXY/
- npongratz 4y ago
  But that basket of currencies is composed of 57.6% EUR. I'm barely an amateur observer of these markets, but it seems to answer the question "dollar sinking or euro strengthening?", it'd be better to look at a basket of currencies that excludes the euro in order to tease out the principal components of the move. And really, should probably also go the other way that looks at a basket of EUR/XYZ currencies and exclude EUR/USD. But again, this is not at all my area of expertise; I'm a rank amateur with barely any skin in the game. I'm very happy to learn other opinions and ways these things are determined.
  - game-of-throws 4y ago
    There's also the Euro Index (EXY) which is hitting all-time lows (at least as far as this chart goes back). Of course EXY includes the EUR:USD pair so it's kind of the reverse problem. https://www.tradingview.com/symbols/TVC-EXY/ https://www.tradingview.com/symbols/TVC-EXY/
  - bartvk 4y ago
    You can also value both currencies in gold, which offers another perspective.
  - balderdash 4y ago
    It’s a fair point. In the last year USD.EUR is up ~20%, dollar index is up ~20%, so to your point the other half the index is has also weakened against the dollar. WSJ Dollar index which is even broader is also up.
- davrosthedalek 4y ago
  Can someone ELI5 how the USD can go up vs EUR if US has higher inflation (about 1% or so) than the eurozone (or at least Germany). Wouldn't that mean that stuff gets cheaper in EU compared to US? Shouldn't there be arbitrage at some point?
dageshi 4y ago
Interest rates and interest rate expectations are pretty much the most powerful driving force in the currency markets. The US is at 1.5%, the Euro area is still -0.5% a 2% differential and it seems likely the FED will keep raising rates more aggressively than the EU will.
ranger207 4y ago
> ...caused by actual supply constraints Just curious, how would supply constraints lead to inflation? I'd expect lower supply would cause deflation
- acover 4y ago
  Inflation refers to dollars buying less hamburgers. When there's a supply constraint - not enough hamburgers to go around - the price of hamburgers goes up and as such there is inflation.
  - ranger207 4y ago
    Ah, I misunderstood the parent comment to be referring to _money_ supply. Whoops!
- wbsss4412 4y ago
  Prices are set by supply and demand. Inflation refers to the price of goods increasing. If supply reduces and/or demand increases, all else equal, prices increase. If supply increases and/or demand decreases, all else equal, prices decrease.
ralph84 4y ago
> whether inflation is being caused by currency policy ... or being caused by actual supply constraints No reason it can't be both. Plus USD is still viewed as the safe haven fiat currency (deserved or not), so USD always displays relative strength vs. other fiat currencies when there is stress in the markets.
lvl102 4y ago
- turbinerneiter 4y ago
  How is this the Germans fault?
  - baq 4y ago
    Their energy policy for the last 20 years, government officials becoming Gazprom executives, their negligence to build LNG terminals…
    - origin_path 4y ago
      There are 28 large scale LNG import terminals in Europe. One or two more in Germany wouldn't change the scale of the problem much. The actual original point though, was that ECB cannot raise rates without causing Italy and others to default, or requiring 'austerity' that would probably cause civil unrest. That isn't the fault of the Germans. It is the fault of other European countries that have never got a grip on their government spending levels.
      - makomk 4y ago
        There's literally no way to get gas from those terminals to Germany on a large enough scale. They really went all-in on dependence on Russian natural gas and their politicians seem to have been richly rewarded for it.
atwood22 4y ago
What does it mean to be supply constrained? The simple definition means you don't have enough supply to meet demand, but that's too simplistic a definition. Supply constraints can happen for two reasons. The supply curve can shift (i.e. a decrease in supply), or the demand curve can shift (i.e. an increase in demand). The Fed's 0% interest rate, coupled with unprecedented government stimulus, lead to a huge increase in demand. So yes, technically, we are supply constrained, but we are supply constrained because of an increase in demand caused by government policy. Just an example, as part of the CARES act, congress allocated 800 billion for PPP loans that were supposed to go towards payroll. Now the Federal Reserve finds only 25% went to employees. So that was basically an unnecessary infusion of 600 billion into the economy over a really short time window. And that money went to people who already had plenty of money. Is it a surprise why the housing stock is so low?
newhotelowner 4y ago
I think supply shortage is the reason for the high prices. I can't get supplies for my business. My new treadmill at the business was supposed to be delivered last April. They have not provided a new date. It took LG 6-7 months to replace (ship) the broken TV under warranty. My franchise changed towel/linen manufacturing 3 times as old suppliers are not able to deliver. New prices have more than doubled. Lotion order I put in Nov was delivered in June. Some might say this is anecdotal but this is the case at every single hotel in America. A lot of small hotel owners are buying supplies from local Walmart stores too.
slaw 4y ago
US dollar is not rising in value it is sinking, but Euro is sinking faster.

revnode 4y ago

Europe simply printed more money than the US. Same for everyone else.

s1artibartfast 4y ago
I find that hard to believe. Do you have a reference? My understanding that the US stimulus was generally unparalleled
- misja111 4y ago
  You're right, US has printed much more money. The EU is catching up though. In 2021, EU total amount of quantitative easing was 2.947 trillion euro's. https://en.wikipedia.org/wiki/European_Central_Bank#Low_inflation_and_quantitative_easing_(2015%E2%80%932019) https://en.wikipedia.org/wiki/European_Central_Bank#Low_infl... US: $4.5 trillion https://en.wikipedia.org/wiki/Quantitative_easing#:~:text=The%20Federal%20Reserve%20began%20conducting,to%20the%20COVID%2D19%20pandemic https://en.wikipedia.org/wiki/Quantitative_easing#:~:text=Th....
  - mardifoufs 4y ago
    That's just for 2021 though.
    - s1artibartfast 4y ago
      I think 2020 was even more
    - mathiasgredal 4y ago
      The cumulative numbers as of right now: EU: 3.4 trillion euro (https://www.ecb.europa.eu/mopo/pdf/APP_cumulative_net_purchases_by_programme.png?okju https://www.ecb.europa.eu/mopo/pdf/APP_cumulative_net_purcha...) US: 8.9 trillion usd (https://www.statista.com/statistics/1121416/quantitative-easing-fed-balance-sheet-coronavirus/ https://www.statista.com/statistics/1121416/quantitative-eas...)
  - mrep 4y ago
    I'd say the eurozone is winning in what matters: 3 trillion euros / ≈14.5 trillion euro gdp of the eurozone ≈ 20.6% of gdp 4.5 trillion USD / ≈23 trillion US gdp ≈ 19.5% of gdp

balderdash 4y ago

The dollar is strengthening, you can look at the dollar index [1] which compares the dollar to a basket of developed market currencies [2] [1]https://en.m.wikipedia.org/wiki/U.S._Dollar_Index https://en.m.wikipedia.org/wiki/U.S._Dollar_Index [2] https://www.wsj.com/market-data/quotes/index/DXY/ https://www.wsj.com/market-data/quotes/index/DXY/

npongratz 4y ago
But that basket of currencies is composed of 57.6% EUR. I'm barely an amateur observer of these markets, but it seems to answer the question "dollar sinking or euro strengthening?", it'd be better to look at a basket of currencies that excludes the euro in order to tease out the principal components of the move. And really, should probably also go the other way that looks at a basket of EUR/XYZ currencies and exclude EUR/USD. But again, this is not at all my area of expertise; I'm a rank amateur with barely any skin in the game. I'm very happy to learn other opinions and ways these things are determined.
- game-of-throws 4y ago
  There's also the Euro Index (EXY) which is hitting all-time lows (at least as far as this chart goes back). Of course EXY includes the EUR:USD pair so it's kind of the reverse problem. https://www.tradingview.com/symbols/TVC-EXY/ https://www.tradingview.com/symbols/TVC-EXY/
- bartvk 4y ago
  You can also value both currencies in gold, which offers another perspective.
- balderdash 4y ago
  It’s a fair point. In the last year USD.EUR is up ~20%, dollar index is up ~20%, so to your point the other half the index is has also weakened against the dollar. WSJ Dollar index which is even broader is also up.
davrosthedalek 4y ago
Can someone ELI5 how the USD can go up vs EUR if US has higher inflation (about 1% or so) than the eurozone (or at least Germany). Wouldn't that mean that stuff gets cheaper in EU compared to US? Shouldn't there be arbitrage at some point?

dageshi 4y ago

Interest rates and interest rate expectations are pretty much the most powerful driving force in the currency markets. The US is at 1.5%, the Euro area is still -0.5% a 2% differential and it seems likely the FED will keep raising rates more aggressively than the EU will.

ranger207 4y ago

> ...caused by actual supply constraints Just curious, how would supply constraints lead to inflation? I'd expect lower supply would cause deflation

acover 4y ago
Inflation refers to dollars buying less hamburgers. When there's a supply constraint - not enough hamburgers to go around - the price of hamburgers goes up and as such there is inflation.
- ranger207 4y ago
  Ah, I misunderstood the parent comment to be referring to _money_ supply. Whoops!
wbsss4412 4y ago
Prices are set by supply and demand. Inflation refers to the price of goods increasing. If supply reduces and/or demand increases, all else equal, prices increase. If supply increases and/or demand decreases, all else equal, prices decrease.

ralph84 4y ago

> whether inflation is being caused by currency policy ... or being caused by actual supply constraints No reason it can't be both. Plus USD is still viewed as the safe haven fiat currency (deserved or not), so USD always displays relative strength vs. other fiat currencies when there is stress in the markets.

lvl102 4y ago

turbinerneiter 4y ago
How is this the Germans fault?
- baq 4y ago
  Their energy policy for the last 20 years, government officials becoming Gazprom executives, their negligence to build LNG terminals…
  - origin_path 4y ago
    There are 28 large scale LNG import terminals in Europe. One or two more in Germany wouldn't change the scale of the problem much. The actual original point though, was that ECB cannot raise rates without causing Italy and others to default, or requiring 'austerity' that would probably cause civil unrest. That isn't the fault of the Germans. It is the fault of other European countries that have never got a grip on their government spending levels.
    - makomk 4y ago
      There's literally no way to get gas from those terminals to Germany on a large enough scale. They really went all-in on dependence on Russian natural gas and their politicians seem to have been richly rewarded for it.

atwood22 4y ago

What does it mean to be supply constrained? The simple definition means you don't have enough supply to meet demand, but that's too simplistic a definition. Supply constraints can happen for two reasons. The supply curve can shift (i.e. a decrease in supply), or the demand curve can shift (i.e. an increase in demand). The Fed's 0% interest rate, coupled with unprecedented government stimulus, lead to a huge increase in demand. So yes, technically, we are supply constrained, but we are supply constrained because of an increase in demand caused by government policy. Just an example, as part of the CARES act, congress allocated 800 billion for PPP loans that were supposed to go towards payroll. Now the Federal Reserve finds only 25% went to employees. So that was basically an unnecessary infusion of 600 billion into the economy over a really short time window. And that money went to people who already had plenty of money. Is it a surprise why the housing stock is so low?

newhotelowner 4y ago

I think supply shortage is the reason for the high prices. I can't get supplies for my business. My new treadmill at the business was supposed to be delivered last April. They have not provided a new date. It took LG 6-7 months to replace (ship) the broken TV under warranty. My franchise changed towel/linen manufacturing 3 times as old suppliers are not able to deliver. New prices have more than doubled. Lotion order I put in Nov was delivered in June. Some might say this is anecdotal but this is the case at every single hotel in America. A lot of small hotel owners are buying supplies from local Walmart stores too.

slaw 4y ago

US dollar is not rising in value it is sinking, but Euro is sinking faster.