Hacker News Reader

Comment by taylodl | Hacker News Reader

Is it the Euro sinking or the US dollar rising? The U.S. dollar has been gaining a lot of value over the past couple of quarters - enough so to call into question whether inflation is being caused by currency policy, as the Federal Reserve believes, or being caused by actual supply constraints - as I and several other economists believe (but I'm not an economist). The fact the dollar is rising in value and yet prices have still continued to rise tells me the problem is supply.

Supply shortages are something Western policy makers haven't had to contend with for quite some tine, certainly not in the lifetime of the policy makers!

View on HN

The dollar is strengthening, you can look at the dollar index [1] which compares the dollar to a basket of developed market currencies [2]

[1]https://en.m.wikipedia.org/wiki/U.S._Dollar_Index

[2] https://www.wsj.com/market-data/quotes/index/DXY/

But that basket of currencies is composed of 57.6% EUR. I'm barely an amateur observer of these markets, but it seems to answer the question "dollar sinking or euro strengthening?", it'd be better to look at a basket of currencies that excludes the euro in order to tease out the principal components of the move. And really, should probably also go the other way that looks at a basket of EUR/XYZ currencies and exclude EUR/USD.

But again, this is not at all my area of expertise; I'm a rank amateur with barely any skin in the game. I'm very happy to learn other opinions and ways these things are determined.

There's also the Euro Index (EXY) which is hitting all-time lows (at least as far as this chart goes back). Of course EXY includes the EUR:USD pair so it's kind of the reverse problem.

https://www.tradingview.com/symbols/TVC-EXY/

It’s a fair point. In the last year USD.EUR is up ~20%, dollar index is up ~20%, so to your point the other half the index is has also weakened against the dollar. WSJ Dollar index which is even broader is also up.

You can also value both currencies in gold, which offers another perspective.

Can someone ELI5 how the USD can go up vs EUR if US has higher inflation (about 1% or so) than the eurozone (or at least Germany). Wouldn't that mean that stuff gets cheaper in EU compared to US? Shouldn't there be arbitrage at some point?

Eurozone is running at equivalent inflation numbers [1] + interest rates are higher in the US

[1] https://www.euronews.com/my-europe/2022/07/01/inflation-in-t...

Seems to be a new thing, see [1]. Would you expect the USD to devalue against the EURO in that decade? I don't think we see that.

[1] https://www.bloomberg.com/news/articles/2022-05-03/europe-in...

There is no arbitrage because the USD is expected to weaken against the euro due to higher interest rates. The December 2022 EUR/USD futures are trading at 1.016

> whether inflation is being caused by currency policy ... or being caused by actual supply constraints

No reason it can't be both. Plus USD is still viewed as the safe haven fiat currency (deserved or not), so USD always displays relative strength vs. other fiat currencies when there is stress in the markets.

Interest rates and interest rate expectations are pretty much the most powerful driving force in the currency markets. The US is at 1.5%, the Euro area is still -0.5% a 2% differential and it seems likely the FED will keep raising rates more aggressively than the EU will.

What does it mean to be supply constrained? The simple definition means you don't have enough supply to meet demand, but that's too simplistic a definition. Supply constraints can happen for two reasons. The supply curve can shift (i.e. a decrease in supply), or the demand curve can shift (i.e. an increase in demand). The Fed's 0% interest rate, coupled with unprecedented government stimulus, lead to a huge increase in demand. So yes, technically, we are supply constrained, but we are supply constrained because of an increase in demand caused by government policy.

Just an example, as part of the CARES act, congress allocated 800 billion for PPP loans that were supposed to go towards payroll. Now the Federal Reserve finds only 25% went to employees. So that was basically an unnecessary infusion of 600 billion into the economy over a really short time window. And that money went to people who already had plenty of money. Is it a surprise why the housing stock is so low?

I think supply shortage is the reason for the high prices. I can't get supplies for my business.

My new treadmill at the business was supposed to be delivered last April. They have not provided a new date.

It took LG 6-7 months to replace (ship) the broken TV under warranty.

My franchise changed towel/linen manufacturing 3 times as old suppliers are not able to deliver. New prices have more than doubled.

Lotion order I put in Nov was delivered in June.

Some might say this is anecdotal but this is the case at every single hotel in America. A lot of small hotel owners are buying supplies from local Walmart stores too.

US dollar is not rising in value it is sinking, but Euro is sinking faster.

> ...caused by actual supply constraints

Just curious, how would supply constraints lead to inflation? I'd expect lower supply would cause deflation

Inflation refers to dollars buying less hamburgers.

When there's a supply constraint - not enough hamburgers to go around - the price of hamburgers goes up and as such there is inflation.

Ah, I misunderstood the parent comment to be referring to _money_ supply. Whoops!

Prices are set by supply and demand.

Inflation refers to the price of goods increasing.

If supply reduces and/or demand increases, all else equal, prices increase. If supply increases and/or demand decreases, all else equal, prices decrease.

Europe simply printed more money than the US. Same for everyone else.

I find that hard to believe. Do you have a reference?

My understanding that the US stimulus was generally unparalleled

You're right, US has printed much more money. The EU is catching up though.

In 2021, EU total amount of quantitative easing was 2.947 trillion euro's. https://en.wikipedia.org/wiki/European_Central_Bank#Low_infl...

US: $4.5 trillion https://en.wikipedia.org/wiki/Quantitative_easing#:~:text=Th....

I'd say the eurozone is winning in what matters:

3 trillion euros / ≈14.5 trillion euro gdp of the eurozone ≈ 20.6% of gdp

4.5 trillion USD / ≈23 trillion US gdp ≈ 19.5% of gdp

That's just for 2021 though.

The cumulative numbers as of right now:

EU: 3.4 trillion euro (https://www.ecb.europa.eu/mopo/pdf/APP_cumulative_net_purcha...)

US: 8.9 trillion usd (https://www.statista.com/statistics/1121416/quantitative-eas...)

I think 2020 was even more

Reply on news.ycombinator.com