The dollar's surge to a 12-year high against the euro has soured central banks on the common European currency, adding yet another twist to the raging global currency war.
The euro has dropped 21 percent in the last year, and many experts think it is headed lower still, with central banks helping to spark the move.
"It is quite likely that central banks will continue to divest from the euro," Stephen Jen, managing partner at money manager SLJ Macro Partners, told The Wall Street Journal
. "The main reason is that negative yields are a turnoff for central banks."
Central banks generally hold their currency reserves in bonds. The German government 2-year bond yield stood at negative 0.25 percent Monday morning, compared with a positive 0.57 percent for 2-year U.S. Treasurys.
That interest-rate differential makes dollars much more attractive than euros for central banks (and other investors).
"The euro no longer looks to be an attractive alternative to the persistent reserve currency, which is the dollar," Robert Sinche, global strategist at Amherst Pierpont Securities, told The Journal.
Meanwhile, the media is full of stories about how the soaring dollar will benefit Americans traveling overseas or purchasing foreign products.
For tourists, the dollar now converts into more foreign currency, and for consumers the stronger greenback makes foreign goods cheaper in dollar terms.
But not so fast, says New York Times columnist James Stewart
"Nothing is simple when it comes to foreign currency fluctuations and their impact on consumer prices," he writes. In a trip to Europe recently, he found that "there were indeed some remarkable bargains, but not across the board and not on some of the most expensive items."
Supply and demand determine prices, of course. "Firms set different prices in different markets simply because of differences in demand," Antonio Rodriguez-Lopez, professor of economics at the University of California, Irvine, told Stewart.
Foreigners visiting Europe represent a market of their own. "To the extent that the weak euro increases demand from travelers spending dollars, sellers who cater to that market can quickly adjust prices, even if those prices are quoted in euros and the products are sold in Europe," Stewart points out.
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