While the euro’s plunge toward parity is helping rev-up Europe’s stagnant economy, it’s wreaking havoc across the rest of the world.
“It exacerbates exits from emerging markets, it’s putting pressure on China to devalue their renminbi, it’s actually weighing on commodity prices,” David Woo, Bank of America Corp.’s head of global rates and currencies, said in an interview on Bloomberg Television’s “Surveillance” with Tom Keene. “It’s very clear the Standard & Poor’s 500 does not like a weaker euro and stronger dollar.”
The specter of higher U.S. interest rates along with the European Central Bank’s expanded bond-buying program has rippled through the global economy. While the euro has declined at a record pace, export-oriented nations such as China have resorted to weakening their own currencies to maintain competitiveness. And the lower exchange rate has cut the purchasing power of oil and other commodities, which are priced in the dollar.
The euro has slumped 22 percent slump in the past year to $1.0772 versus the dollar, weakening for nine straight months, a record skid stretching back to the euro’s 1999 inception.
“The amazing thing is, as people get out of Europe and euro goes down, it’s only forcing them to exit emerging markets even more quickly,” Woo said. “When do people invest in EM? When the dollar’s going down and when they’re basically looking for some positive carry.”
Emerging-market currencies that offer the highest yields, including Brazil’s real and Turkey’s lira, have declined more than 10 percent in the past six months as oil prices slumped almost 50 percent.
And the single currency’s drop isn’t over, according to Woo, who said that by the end of June it may reach to $1, a level not seen since 2002.
“We’re definitely on parity watch,” he said.