"If not now when?" With this eloquent statement Michael Mussa (Los Angeles, 1944- Washington DC, 2012) triggered one of the most successful concerted actions of the main central banks on the planet. It was the end of September 2000, and at the time, Mussa was serving as the IMF's chief economist. With his words, massive dollar purchase operations were ordered by the Federal Reserve, the Bank of England and sister institutions such as those of Japan, Australia or Canada to contain the free fall of the euro.
The European currency was barely one year and nine months old, but since it came out in the foreign exchange markets, it aroused doubts and envy; especially, in the neoliberal doctrine on the other side of the Atlantic, although with the occasional counterpoint, such as that of the 1999 Nobel Prize winner, the Canadian Robert Mundell, who always classified it as a "resounding success" of monetary engineering. The Fund's autumn appointment -in Prague- opened with the euro in its deepest pit, sunk at 0.86 dollars, too many investors in a punishing attitude and not a few unknowns to clear up. Among others, that it was not even physically circulating in its economic space yet and had already allowed itself to be comfortably snatched from all the surplus on parity with the greenback.
More than two decades later, history appears to be about to repeat itself. Analysts judge that the current exchange rate (1.05) assumes that the euro is under the centrifugal force of the market and that the very inertia of events will fuel the dominance of the dollar. In the middle of the currency dance, with the ruble in the crosshairs of the weaponization or militarization of financial measures that the West has decreed against Russia for the invasion of Ukraine, the US currency has become one more weapon to weaken Vladimir Putin.
Putin's decision, at the request of the increasingly prestigious governor of the Bank of Russia, Elvira Nabiullina, to impose on his European clients the purchase of gas from their territory in rubles has shaken the invisible hand that also rocks the foreign exchange markets . The Kremlin's currency has emerged as the most revalued in 2022, despite retaliation, with almost 30% above the value with the dollar compared to its price on March 7, when it registered its lowest level (143 rubles per dollar) two weeks after the occupation of Ukraine.
European payments to Moscow are playing a determining role in the dominance of the ruble, warns María Demertzis, deputy director of Bruegel, a pan-European think-tank based in Brussels. Moscow avoids the draconian sanctions of the West due to the ability of its central bank to use its foreign currency reserves and avoid at various times the risks of default predicted by rating agencies and investors.
However, William Jackson, chief economist for emerging markets at Capital Economics, warns that the value of the ruble "is not the best barometer" of the effects of the reprisals that have been decreed against Russia because, in his opinion, "they are damaging to an autarkic economy in which inflation has skyrocketed and banks are beginning to show signs of a lack of liquidity and a dramatic tightening of their credit conditions”. Jackson recalls that interest rates were placed four days after the invasion, in an urgent move, at 20%, a level that necessarily reinforces the value of currencies. But also, and above all, the obligation for Russian energy companies to convert 80% of their income from their international sales in foreign currencies into rubles.
This entire house of cards could fall apart and start another deal of cards in the foreign exchange markets if, as the US Treasury shuffles, a blockade of Russian debt payments in dollars begins, until now allowed by the White House, which would tighten again the option of non-payment.
Ukraine is, however, only a pike among the reasons that have weakened the euro. The monetary area "is a cocktail of bad news", with inflation at historical rates, signs of energy insecurity and recession drums, warns Valentin Marinov, of Crédit Agricole. The analyst points out that the euro "is the escape valve for all these fears", hence the loss of 6% of its value against the dollar.
The GDP of the euro, unlike that of the United States, which fell by 0.4% in the first quarter, is not yet in contraction, but the outlook is worse in terms of business profits and employment. Hence, in study services such as HSBC's, they will not find the euro's floating line against the dollar in the coming months, which will bring added inflation through strategic imports that, such as gas and oil, are denominated in the american currency.
The dollar remains the favorite choice of investors against other currencies. In fact, the Swiss franc, the refuge value par excellence in currencies, is also sailing on the horizon of parity with the dollar for the first time in two years and the yen is at its lowest level since 2022 although, in this case, with an imported inflationary spiral. At Bank of America, they believe that the advancement of interest rate hikes by the Fed and its latest rise in price by half a point -with which the price of money has left behind its proximity to zero- have sharpened the strength of the dollar, which will retain a value above parity with the euro this year and next.
On the other hand, the markets have reinforced their doubts about a "too late" maneuver by the ECB to stop the euro's decline towards parity, explains Marinov. The president of the ECB, Christine Lagarde, announced that the rate hike will come in July and that negative ground will be abandoned in September.
Perhaps the most precise in his diagnosis of the situation among the European monetary authorities has been the governor of the Bank of France, Francois Villeroy de Galhau, who, without expressly mentioning specific actions of the institution on the value of the currency -a taboo subject in oversight bodies - revealed concern about excessive weakness that would lead to amending the Frankfurt roadmap. In particular, to curb "external inflationary pressures and thus contribute to price stability, the essential objective of the ECB," he recalled.