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Europe is a currency saint but…

Be careful what you wish for. The euro’s founding fathers dreamed of a superpower currency that could stand toe-to-toe with the dollar, freeing Europe from US monetary hegemony.

France’s Charles de Gaulle liked to grumble that America enjoyed an “exorbitant privilege” as holder of the world’s reserve currency, able to get away with economic murder. Now they have such a trophy themselves, only to discover what Washington learned the hard way: it is an exorbitant burden, and at times a curse.

China’s central bank has been buying fistfuls of euros as it accumulates a world record $3.7 trillion in foreign reserves, and its motives are not entirely friendly. So have the central banks of Russia, Brazil, and the Mid-East oil sheikdoms, all aiming to cut reliance on the US dollar, part of a $9 trillion build-up in reserves that has flooded into the euro with tidal force.

In China’s case, the government is deliberately driving down the yuan to capture export share. You could say China is exporting excess manufacturing capacity to Europe, or in plain talk exporting unemployment.

This is why the euro has long been too strong for its own good, though there are many other reasons. By forcing banks to raise capital buffers too quickly, in a pro-cyclical fashion at the wrong moment, the EU authorities are unwittingly causing many of them to sell assets across the world. It is hard to find figures on repatriation flows but Morgan Stanley estimates that the sums have been large enough to drive the exchange rate.

Source The Telegraph

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