Will Markets Recover? – Economic Highlights

A lot of the movement in the exchange value of the euro vs. U.S. dollar was expected. After all, the European Central Bank (ECB) was expected to come out with a QE program all along. That’s why while the central bank only started purchasing bonds this week, the region’s government bond yields and the value of the common currency have been moving in the desired direction for a while. With one Euro today worth a little over $1.06, down from $1.07 yesterday and $1.39 this time last year, there is little doubt now that the two currencies are moving towards parity in the not-too-distant future.

A lot will depend on the trajectory of Fed policy in driving foreign exchange rates in the coming days. Expectations have steadily been rising lately that they will start the rate-hike process in June, with next week’s FOMC meeting getting the ball rolling by dropping the ‘patient’ phrase. The Fed’s mandate is independent of foreign exchange values, but the price stability mandate is related to the exchange value of the dollar as a stronger greenback is fundamentally disinflationary. On top of that is the lobby of exporters who are unhappy with a strong dollar for competitive reasons.

As such, the exchange rates could be reaching levels that have a bearing on the course of monetary policy. It will be interesting to see if the Fed will acknowledge this reality in next week’s meeting or not.