The Euro has weakened against the US dollar despite hawkish comments from ECB officials.
Bini Smaghi and Liebscher are the latest monetary policy committee members to support higher interest rates. According to Bini Smaghi, interest rates are in no way restrictive since inflation is at 4 percent and will probably stay above 3 percent for a few months. Liebscher agrees that inflation is a cause for concern which suggests that for the ECB, another rate hike could still be on the table. In their eyes, a stronger Euro could actually help rather than hurt current conditions – granted of course their priorities are on inflation. Experts like John Lipsky the deputy managing director at the IMF however is becoming increasingly concerned that the euro is now overvalued while the US dollar is closer to its medium term equilibrium. According the Economist Magazine’s Big Mac Index, Lipsky is right. As of July 2, when the EUR/USD was trading at 1.5885, it was calculated to be 22 percent above its fair value. The currency that is most overvalued is the Icelandic Kronur at 123 percent. The most undervalued currency is Chinese Yuan at 58 percent. Meanwhile the Swiss Franc received no help from the stronger than expected trade balance. The country’s trade surplus hit a record last month due largely to declining imports.
