Competitive Devaluations against the Euro
The continued balance sheet expansion in certain major global central banks has resulted in a depreciation of these countries’ currencies over the past few months. Since last June, the trade-weighted Japanese yen, British pound, and U.S. dollar have depreciated 15.1%, 2.6%, and 2.0%, respectively. By contrast, the euro has appreciated 5.8% against its major trading partners’ currencies, corresponding with a contraction of 5.6% in the European Central Bank’s (ECB) balance sheet during the same time. The contraction in the ECB’s balance sheet was caused by European banks returning their loans from the central bank as a result of improving economic sentiment in the eurozone. Nevertheless, economic fundamentals in the eurozone remain weak, and most peripheral nations are still in recessions. The competitive devaluation in other major economies may push the value of the euro to growth-inhibitive levels, exacerbating the eurozone’s problems.
CHANGE IN CENTRAL BANK ASSETS VS. CHANGE IN TRADE-WEIGHTED EXCHANGE RATES (JUNE 2012 – PRESENT)