Category Archives: euro

The Unwinding of the Carry Trade Has Finally Hit Currencies

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Why has the yen strengthened so much this week, even though the Japanese stock market has plummeted?  The financial media have largely got this one right:   the answer is unwinding of the carry trade, and the associated flight to quality, which means flight to yen and dollar (cash and treasury bills).

 

This was to be expected.  It is an unseemly tooting of ones’ own horn, but — earlier this year I wrote in an article in the Milken Institute Review (vol. 10, no. 1, pages 38-45)

“The traditional pattern is most clear with the carry from the yen to the euro:  it has been predictably profitable for the last five years, and this will predictably end soon, as the yen reverses its depreciation against the euro.” read more

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The euro’s challenge to the dollar does not depend on tipping

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My friend Barry Eichengreen, together with Marc Flandreau, has written a column in today’s Financial Times, that appears under the headline “Why the euro is unlikely to eclipse the dollar.” The body of the article is a claim that network externalities and tipping points are not important, or perhaps that they once were but no longer are.

The first two steps of their argument are:
(1) a multiple-currency system is the historical norm. The dollar-denominated system that we have experienced for more than 60 years is an aberration, so network externalities (aren’t) important.
(2) The dollar surpassed the pound in the 1924-25, not in 1948, so lags and tipping phenomena are not important. read more

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The Euro Could Surpass the Dollar Within 10 years

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Question from The International Economy Survey of Experts: 
Ten years from now, which will likely be the next great global currency?

My answer: 
Contrary to fevered popular speculation in the 1990s, the yen and the mark never had the potential to challenge the dollar as premier international currency:  their home economies were smaller than the US and their financial markets less well developed and liquid than New York.   The euro, however, is a credible challenger:  Euroland is roughly as big as the United States.  Indeed, evaluated at the most recent exchange rates, the euro economy has just now surpassed the US economy in size.   Also the euro has shown itself a better store of value than the dollar.   These are two of the most important determinants of international reserve currency status. read more

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