US President Trump took to Twitter in order to criticize the valuation of the Euro and how this puts the US at a disadvantage. While many grew accustomed to Trump tweeting his dislikes at odd times about many different things, is the Euro undervalued? According to the purchasing-power-parity model used by the Organization for Economic Cooperation and Development (OECD), Trump is correct in his anger. The model suggests that the Euro is undervalued by 22% against the US Dollar. This makes it the third most undervalued currency, trailing only the Mexican Peso which is undervalued by almost 106% and the South Korean Won which is undervalued by roughly 39%.
Some analysts created what is know as the “Big Mac” analysis which looks at how much a Big Mac costs in different countries if purchased in US Dollars. This shows that the Euro is undervalued by 15%. The Chief Global FX Strategist Kit Juckes at Societe Generale agrees and added “The euro’s definitely undervalued on most measures. A persistent current-account surplus when unemployment is falling makes it hard to argue the currency isn’t undervalued.” Will there be a change and how may this impact forex trading online? Over the past twelve months, the Euro depreciated roughly 4% against the US Dollar as the US Fed has increased interest rates. A trend which is likely to reverse over the coming months.
This brings another favorite Trump target in play, his own central bank. The increase in interest rates, which he publicly criticized, have had an impact on Euro valuation. We have a globally connected financial system and a development on one end has ripple effect throughout the system. The Head of Currency Strategy at Rabobank, Jane Foley, pointed out that “The fact that the Fed has been the only Group-of-10 central bank to ratchet up a significant amount of policy normalization since 2015 certainly helped support the USD.” Trump’s trade war with China may have put the US Fed in a position to cut interest rates and weaken the US Dollar.
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