The euro is at $1.425 now, down from $1.50 less than a month ago.
Dollar's Future Looks Brighter Than the Euro'sNEW YORK -- How quickly the tables turn.
Two weeks ago, after the euro had broken back through the $1.50 barrier, the consensus seemed to be that it would continue the upward track it had maintained against the dollar since March. Yet here we are on Tuesday, testing a floor at $1.45.
The about-face is no accident. While it's perhaps too early to call a definitive end to the dollar's slide, there are fundamental reasons why it has outperformed its European counterpart this month. These get down to the relative capacity of the two central banks involved to confront their particular financial and economic challenges. And for now, the Federal Reserve is getting higher marks than the European Central Bank.
Far from confirming a commonly heard sky-is-falling view that an irresponsible Fed will lose control of inflation, currency markets have voiced confidence in policy makers' ability to protect price stability when needed.
The mere whiff of a stronger-than-expected U.S. economic recovery -- as seen with the November jobs and retail sales reports, and Tuesday's industrial production and producer price data -- has driven buyers into the dollar. The bet is that the Fed will tighten policy earlier than previously expected, bringing forward a projected narrowing in the difference between U.S. rates and those of the dollar's higher-yielding counterparts. If investors were really concerned about inflation, the dollar should have fallen.
Few expect the Fed's Open Market Committee to do or say anything to soften its commitment to keeping rates near zero "for an extended period" when it concludes a two-day meeting Wednesday, but these recent data mean investors can no longer afford to be complacent over the policy outlook. From this moment on, investors will be on the alert for signs that an "exit strategy" is in the works -- be it in the policy statement, at congressional hearings or in official speeches. All this is dollar-supportive.
For its part, the euro's decline has been accompanied by a series of mini-crises, each speaking to the difficulty the ECB faces in satisfying the disparately spread members of the European Monetary Union.
In Greece, there are worries about a possible sovereign default, a risk, though still highly unlikely, that would be exacerbated by any ECB move to raise interest rates. Meanwhile, other sovereigns such as Spain, Portugal and Ireland are seeing their credit standing come under attack amid concerns about sluggish growth mixed with near-double-digit budget deficits.
Ongoing banking woes in Austria, meanwhile, reminded investors that the European banking system still has some cleaning up to do.
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Spain and Greece better announce "internal devaluation" soon. The problem when you don't control your own monetary policy is that this is often the only choice in situations like this.
