Euro & The Gold Price: $1.1873      

The € is easier still this week and showing signs that this weakness will persist for some time, despite the expectation of an interest rate hike soon.   The factors usually attributed with causing the strength or weakness of the currency, are changing.   Most observers for the last generation have pointed to interest rate differentials, growth differentials and general economic comparisons as being the cause of exchange rate fluctuations.   A glance at the performance of currencies against each other, have shown a different picture.   The responsible management of the Eurozone economy despite the objections of participating nations, should have led to an extremely strong € against, particularly the U.S.$, but it hasn’t.   In the last year and as of now, the small changes in the exchange rate between the two show these factors have not influenced the exchange rate.   This is heavily emphasised when we see the strength of the $ at present, when its Trade deficit and growing Capital deficit have had virtually no impact on the $’ exchange rate.  

What should we conclude from this?   Gold’s performance against all currencies points the way, showing that the straight comparison of one currency against another will not suffice to point to or even explain a currency’s performance.   Exchange rates come back to the single fundamental of demand and supply at the time the exchange rate is being priced.   These depend on Capital and Trade flows alone.   Trade is a consequence of the pricing of goods being traded internationally, but Capital flows are the consequence of investment perceptions [both direct long-term investment and short-term liquidity management], consequential trade surpluses or deficits, speculative flows, Central Bank exchange rate management as well as a currency’s reserve currency status in the global monetary system. 

What is now coming to the fore is that Central Bank exchange rate management is far greater than the market has believed before.   It is this that can describe a nation’s international competitiveness and contribute to its Trade deficit or surplus.   

In the case of the €, the prime contributor to its existence is its internal use in Europe, where it is the currency of 400 million people.   The importance of its external value diminishes against this unchanging reality.   Its exchange rate has grown from its initial U.S.$0.9 value up to $1.35 at its peak, but for the last year and more it has held around current levels [around $1.20] a level that has defied economic fundamentals and implies currency management.   After the $ it is the most important currency in the world.   The stability of its exchange rate against the $ is fundamental to the stability of the global monetary system.   With the U.S. Fed paving the way for currency intervention beyond the ways used to date we expect the intervention to be concentrated on this rate.

We therefore forecast that this rate will remain stable so long as the Fed and the European Central Bank wish it to be.

Is a George Soros plus Warren Buffet alongside a host of other similar currency speculators sufficient to counter such manipulation?   Not unless accompanied by the support of Trade flows and Investment Capital flows.   This theory will be tested in the medium term.  

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