The euro is down and the dollar is up. The currency moves reflect expected monetary policy, but seem to ignore everything else.
GDP growth in the US has been stronger than in most of its developed world trading partners. The foreign exchange movements since May - a 15 per cent increase of the trade-weighted dollar index and a 14 per cent fall of the euro against the greenback - anticipate the policy consequences of this recovery. Thanks to reasonable growth, the US Federal Reserve has ended its quantitative easing programme. The first increase in the policy rate since 2006 is expected sometime in 2015.
The international contrast is great. The Bank of Japan is pushing forward with the largest quantitative easing (QE) programme in modern history. The European Central Bank (ECB) seems finally to be about to start money printing too.
Whether the prospect of a percentage point or so differential in policy interest rates justifies the currency moves is hardly relevant. The foreign exchange market is susceptible to herd instincts and a selective focus. For the last two quarters, interest rates have dominated traders' thinking.
That might not last. When the ECB actually introduces QE, there will be much less to expect, especially if Greece doesn't leave the euro zone. Markets will have to face the hard truth about monetary policy - that it has only a modest effect on GDP growth, employment and trade positions. Then investors' collective attention might shift, perhaps to trade. The Eurozone trade surplus will be 2.2 per cent of GDP in 2014, while the US deficit will be 2.3 per cent, according to Barclays. That points to a stronger euro.
The oil price fall could also be interpreted as dollar-negative. The US imports a smaller share of its oil than either the Eurozone or Japan, so it gains less from the decline. Besides, lower prices threaten the prospects of America's formerly burgeoning shale industry.
The exuberance over the dollar and the dismay over the euro are not entirely irrational. But when the long-standing expectation of Eurozone monetary easing turns into fact, it may be time to sell the greenback.
