Thursday, May 06, 2010

Amateur economics

Perhaps a more economically savvy and inclined reader could comment, but is it fair to say that some fraction of the recent decline of the US stock markets (excepting dramatic short-term spikes like the one this afternoon between 14:30 and 15:00 EDT) is not a "real" decline, but a reflection of the increased value of the dollar relative to the euro?  From what I can see, the euro has fallen about 8.5% against the dollar since mid March, and the US financial markets are actually down about 4% (mostly in the last week or two) over the same time period.  Naively, if dollars are worth more, one should see "deflation" on the dollar-denominated stock markets, I would guess....


Zach said...

Let me take a crack at this:

As the dollar strengthens vs. the Euro, dollar-denominated assets get more expensive compared to Euro-denominated assets. This will tend to drive capital flows Europe-ward. It's for this reason that people are making noise about the Chinese RMB being undervalued -- having a weak currency makes Chinese goods cheaper in dollar terms and helps them to maintain strong export growth.

I don't think that you can explain the last couple weeks' worth of movement in the equity markets by the relative change in value between the USD and EUR, though. At most it's a contributing factor. More important IMO is the problem with the PIGS economies -- I think what you're seeing is more of a flight to safety than anything else. I haven't looked but I'd guess T-bill yields are well down as investors shift their money to safe assets.

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