In recent weeks, we have seen the US Dollar regain strength, and the Fed seems intent on keeping it strong through a tendency towards high rates.
Europe is facing the threat of US tariffs on goods sold to the US. Tariff risk combined with the US Federal Reserve's commitment to maintain 'higher for longer' interest rates makes the dollar more attractive to outside investors and the Euro less attractive..
Interest rates are a driving force behind currency valuations, and 'higher for longer' should keep demand for the US dollar high. But there is more. Put simply, much of currency investing is like real estate; regions with economic vibrancy have higher demand and thus stronger value. Furthermore, when local governments enforce unfavorable policies, such as zoning or taxes, demand begins to slow.
Lack of economic vibrancy and regulatory uncertainty defines Europe at present, applying downward pressure on its currency, recently falling to a two year low. What are the economic and political issues explaining this decline?
PMI stands out. The Purchasing Managers Index (PMI) is an evaluation of the economic health, activity, and trends in the respective country. This is calculated for market sectors, such as manufacturing and services. A rating above 50 indicates sector growth and below 50 signals the sector is shrinking.
PMI Deline
Germany - PMI 42.2
A low PMI, lack of economic vibrancy, and a no-confidence vote for the government are headwinds for Germany. Furthermore, China is quickly becoming a major trading partner across Europe, pressuring Germany's manufacturing sector. Following the boycotts of Russian gas, energy costs have increased significantly, exacerbating their manufacturing problem from a cost perspective.From an economic and political perspective, Germany has some things to work on to get their house in shape...
A low PMI, lack of economic vibrancy, and a no-confidence vote for the government are headwinds for Germany. Furthermore, China is quickly becoming a major trading partner across Europe, pressuring Germany's manufacturing sector. Following the boycotts of Russian gas, energy costs have increased significantly, exacerbating their manufacturing problem from a cost perspective.
From an economic and political perspective, Germany has some things to work on to get their house in shape...
France - PMI 41.9
France, the lowest PMI in the Eurozone, like Germany is facing severe political and economic instability. There is a new Prime Minister with a very low approval rating, and the French manufacturing sector is declining as they struggle to compete with lower-cost global manufacturers like China.France is not the best neighborhood to buy in either...
France, the lowest PMI in the Eurozone, like Germany is facing severe political and economic instability. There is a new Prime Minister with a very low approval rating, and the French manufacturing sector is declining as they struggle to compete with lower-cost global manufacturers like China.
France is not the best neighborhood to buy in either...
France and Germany are Europe's two major economies. When they suffer, Europe and the euro will suffer with them. The current PMI of the Euro Area is 45.2, signaling an overall downturn in economic growth and stability. Geopolitical tensions, labor shortages, and monetary tightening have and will continue to hamper Europe's financial stability. While these issues persist, the international currency environment will remain fragile. In these times of uncertainty, investors need to diversify. The resurgence of the US Dollar and continued rate hikes in US treasuries are a secure way to store your funds. Additionally, emerging markets, specifically those across Latin America show strong growth potential as they progress towards more stable economic environments.
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