The Euro Is Due A Comeback (If This Whole “Russia” Thing Goes Away)

The Euro Is Due A Comeback (If This Whole “Russia” Thing Goes Away)
Stéphane Renevier, CFA

about 2 years ago1 min

An important driver of the strength of one currency versus another is the difference in economic growth between the two countries. As one of the economies grows faster, more investment opportunities open up, more capital flows into the country, and its currency climbs in value relative to the other.

But that hasn't been the case for the euro-dollar since November. The European economy has outperformed its American counterpart over that period, with the EU-US surprise index – which tracks whether the regions beat or miss economists’ economic growth forecasts – climbing from the year’s lows. The odd thing is, the euro has all the while remained weak against the dollar, languishing well below that measure of economic growth.

It’s hard to say exactly why, but it might be down to the threat that the Russian-Ukrainian conflict poses to the euro, given Europe’s reliance on energy prices and geopolitical stability. That could present an opportunity if the situation takes a turn for the better: the return of peace might just be the catalyst the euro needs to catch up with Europe’s economic outperformance.

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