More fake news from Bloomberg, which claimed this morning that the problems of the Trump Administration (themselves largely an artifact of the news media) caused the dollar’s decline against the euro in the past several days’ trading.
It simply isn’t true, as a glance at the data makes clear. The main driver of the euro’s exchange rate with the US dollar is the interest rate differential (particularly the spread between 10-year Treasuries and 10-year Bunds). That’s true almost all the time, but the sensitivity of the exchange rate to the interest-rate spread changes.
The chart shows the EUR exchange rate against the 10-year US-German yield spread since last October, at 1-minute intervals. There are two slopes–one that prevails from October through mid-January, and a second, steeper slope (marked by the red arrow) that prevails from mid-January to the present. In recent weeks, that is, the euro’s movements with respect to the yield differential were exaggerated. With the French elections as well as German state elections in the offing, the euro was more volatile.
The euro rallied after German Chancellor Merkel’s Christian Democrats crushed the Social Democrats in last Sunday’s election in the country’s most populous state. Merkel almost certainly will return for a fourth term as chancellor, and the new government probably will include the pro-business Free Democratic Party. In short, it’s European politics–not American politics–that prompted the Euro rally.