4 ms·

If the USA is entering a recession, how come the dollar is now recovering relative to the euro? Can anybody explain it? http://finance.yahoo.com/currency/conve

If the USA is entering a recession, how come the dollar is now recovering relative to the euro? Can anybody explain it? http://finance.yahoo.com/currency/convert?amt=1&from=EUR&to=USD&submit=Convert http://finance.yahoo.com/currency/convert?amt=1&from=EUR...

pmorici 18y ago
Because Europe is entering a recession too. Given that both are sinking boats it is probably just equalizing from the previous run to the euro in the previous months when this looked like it might be a USA only thing.
- albertcardona 18y ago
  Thanks. So is there any currency that is going up relative to both euro and dollar? Just curious.
  - sjh 18y ago
    The yen: http://finance.google.com/finance?q=JPYUSD http://finance.google.com/finance?q=JPYUSD, http://finance.google.com/finance?q=JPYEUR http://finance.google.com/finance?q=JPYEUR
  - josefresco 18y ago
    I think the Swiss franc was up a bit too. But don't get your financial advice from Hacker News.
    - albertcardona 18y ago
      I live in Switzerland. The CHF went down relative to the dollar over the last two weeks. And no, HN is not my source of financial advice. Actually, I do not have any source for that.
  - deleted 18y ago
    [deleted]
  - ajross 18y ago
    Dude, right now is not the time to be speculating in the currency markets. Sit tight, get your assets into something stable. Spread your risk around. Above all get your spending and cash flow under control so you're prepared for events like a job loss. Do not look for the secret life raft investment that is going to save you, because you'll probably drown holding it.
davidw 18y ago
This article has some speculation as to the motives for its relative stability lately: http://www.economist.com/finance/displaystory.cfm?story_id=12341545 http://www.economist.com/finance/displaystory.cfm?story_id=1...
DenisM 18y ago
It's deflation - everything is going down in price except the dollar.
mdasen 18y ago
Currency prices aren't affected by recession as much as they are by interest rates. The ECB has held really high interest rates through the past few years (which probably wasn't a good economic policy looking back). So, if you buy Euros and deposit them in a European bank, you get higher interest than if you buy dollars and hold them in an American bank. That increases the demand for Euros and when you increase the demand for something, the price goes up. Recently, most central banks (including the European Central Bank) coordinated a rate cut to prevent the economy from collapsing even more than it already has. That means that European banks won't be offering such high interest as they used to and it means that the demand for Euros falls. So, it's not the economy so much as a change in interest rate policy at the European Central Bank. The high price of Euros over the past few years wasn't a vote of confidence in the European economy as much as it was the high interest rates you could get in European bank accounts (when compared to American bank accounts).
- wheels 18y ago
  It's been an interesting trade off. I've not tracked the reasoning behind it, but just from watching how things have played out the strong rates managed to establish the euro as a significant foreign reserve currency, while on the other hand hurting european exports. For the latter reason I'd (again, mostly just uninformedly) expected a rate cut for a while.
  - mdasen 18y ago
    A lot of people have grand theories of how their government is hurting them by things like this. Most of it is just bunk because it just swaps ends. For example: a strong Euro makes European exports expensive. However, a strong Euro makes it cheap to import things. So, VW has a hard time exporting Jettas, but they have an easy time importing the parts they need to make Jettas. It's also one of those situations where that increased demand for Euros would eventually need to be spent. Lots of foreigners put their money in Euros raising the price of Euros, but eventually they'll want to spend it and if their buying power is higher in the US or other non-Eurozone places, they'll dump the Euros for that currency which lessens the demand for Euros. Economics tends toward equilibriums. Lots of things push it out of equilibrium, but not over the long-term. The one thing that higher interest rates tend to do is discourage investment. The profits of non-financial firms doesn't depend on interest rates and I think it's safe to assume that the average firm sees about 10% growth per annum. So, if you (as an investor) can get a guaranteed 6% from a bank or a potentially risky 10% in stocks, stocks look less attractive than when your bank is giving you 2% interest. The reward for the risk of stocks diminishes as interest rates are higher. Likewise, on the loan end, higher interest rates make it less attractive for businesses (or individuals) to borrow money to start a company or buy a house since it diminishes their potential profit and makes it riskier that they will even achieve a profit since their costs are higher. That's not to say raising interest rates is a bad thing in all cases - in fact, during boom times you want to do that in order to manage the economic growth. But when faced with an economic crisis, it's good to get the money flowing more freely (by having lower interest rates).
steveplace 18y ago
Foreign banks are not immune. Also, there's a ton of carry trades unwinding. Recession does not necessarily mean weaker dollar.

pmorici 18y ago

Because Europe is entering a recession too. Given that both are sinking boats it is probably just equalizing from the previous run to the euro in the previous months when this looked like it might be a USA only thing.

albertcardona 18y ago
Thanks. So is there any currency that is going up relative to both euro and dollar? Just curious.
- sjh 18y ago
  The yen: http://finance.google.com/finance?q=JPYUSD http://finance.google.com/finance?q=JPYUSD, http://finance.google.com/finance?q=JPYEUR http://finance.google.com/finance?q=JPYEUR
- josefresco 18y ago
  I think the Swiss franc was up a bit too. But don't get your financial advice from Hacker News.
  - albertcardona 18y ago
    I live in Switzerland. The CHF went down relative to the dollar over the last two weeks. And no, HN is not my source of financial advice. Actually, I do not have any source for that.
- deleted 18y ago
  [deleted]
- ajross 18y ago
  Dude, right now is not the time to be speculating in the currency markets. Sit tight, get your assets into something stable. Spread your risk around. Above all get your spending and cash flow under control so you're prepared for events like a job loss. Do not look for the secret life raft investment that is going to save you, because you'll probably drown holding it.

davidw 18y ago

This article has some speculation as to the motives for its relative stability lately: http://www.economist.com/finance/displaystory.cfm?story_id=12341545 http://www.economist.com/finance/displaystory.cfm?story_id=1...

DenisM 18y ago

It's deflation - everything is going down in price except the dollar.

mdasen 18y ago

Currency prices aren't affected by recession as much as they are by interest rates. The ECB has held really high interest rates through the past few years (which probably wasn't a good economic policy looking back). So, if you buy Euros and deposit them in a European bank, you get higher interest than if you buy dollars and hold them in an American bank. That increases the demand for Euros and when you increase the demand for something, the price goes up. Recently, most central banks (including the European Central Bank) coordinated a rate cut to prevent the economy from collapsing even more than it already has. That means that European banks won't be offering such high interest as they used to and it means that the demand for Euros falls. So, it's not the economy so much as a change in interest rate policy at the European Central Bank. The high price of Euros over the past few years wasn't a vote of confidence in the European economy as much as it was the high interest rates you could get in European bank accounts (when compared to American bank accounts).

wheels 18y ago
It's been an interesting trade off. I've not tracked the reasoning behind it, but just from watching how things have played out the strong rates managed to establish the euro as a significant foreign reserve currency, while on the other hand hurting european exports. For the latter reason I'd (again, mostly just uninformedly) expected a rate cut for a while.
- mdasen 18y ago
  A lot of people have grand theories of how their government is hurting them by things like this. Most of it is just bunk because it just swaps ends. For example: a strong Euro makes European exports expensive. However, a strong Euro makes it cheap to import things. So, VW has a hard time exporting Jettas, but they have an easy time importing the parts they need to make Jettas. It's also one of those situations where that increased demand for Euros would eventually need to be spent. Lots of foreigners put their money in Euros raising the price of Euros, but eventually they'll want to spend it and if their buying power is higher in the US or other non-Eurozone places, they'll dump the Euros for that currency which lessens the demand for Euros. Economics tends toward equilibriums. Lots of things push it out of equilibrium, but not over the long-term. The one thing that higher interest rates tend to do is discourage investment. The profits of non-financial firms doesn't depend on interest rates and I think it's safe to assume that the average firm sees about 10% growth per annum. So, if you (as an investor) can get a guaranteed 6% from a bank or a potentially risky 10% in stocks, stocks look less attractive than when your bank is giving you 2% interest. The reward for the risk of stocks diminishes as interest rates are higher. Likewise, on the loan end, higher interest rates make it less attractive for businesses (or individuals) to borrow money to start a company or buy a house since it diminishes their potential profit and makes it riskier that they will even achieve a profit since their costs are higher. That's not to say raising interest rates is a bad thing in all cases - in fact, during boom times you want to do that in order to manage the economic growth. But when faced with an economic crisis, it's good to get the money flowing more freely (by having lower interest rates).

steveplace 18y ago

Foreign banks are not immune. Also, there's a ton of carry trades unwinding. Recession does not necessarily mean weaker dollar.