Euro pushed down by Eastern Europe?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Euro pushed down by Eastern Europe?

  • Switching from D-mark currency into US dollars in Eastern Europe, caused by uncertainty about the final changeover to the euro, allegedly is the main reason for the euro’s weakness on the foreign exchange markets.
  • This seems plausible at first glance, but switching is at best one factor among many behind the euro’s depreciation.
  • The quantities resulting from switching out of D-marks into US dollars are simply much too small when set against the extensive capital flows from port-folio and direct investment that are driving the dollar-euro exchange rate.
  • The Bundesbank is preparing extensive information for the Eastern European countries and Turkey in close cooperation with the national governments and central banks as well as local banks . The main message is that the D-mark banknotes and coins do not become invalid after February, but can be exchanged – indefinitely – at the Bundesbank directly or via local banks which are special-ised in FX transactions.
  • In addition, the flight into US dollar only makes sense for illegal holdings of D-mark which cannot be converted in the banking system. However, the bulk of Eastern European and Turkish holdings seems to originate from legal sources.
  • The euro has not followed a clear trend for a year now – while switching has probably picked up momentum to a degree which, in theory, would have called for a stronger downtrend.
  • Finally, even if the “switching theory” could explain the euro’s weakness against the US dollar, it fails to explain why it also weakened against many other cur-rencies.
  • D-mark cash holdings and their partial conversion into US dollars in Eastern Europe and Turkey will hardly present a serious risk for the euro exchange rate during the remainder of the euro introduction.

For the full analysis, see

Euro pushed down by Eastern Europe?. For more DB Research analyses see theDeutsche Bank Research website.  

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