The Daily Parker

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The euro hits $1.05

Eurozone economic stagnation has beaten up the currency this week; Krugman explains how it might affect us:

[T]he main driver [in the euro's fall] is the perception of permanent, or at any rate very long term European weakness. And that’s a situation in which Europe’s weakness will be largely shared with the rest of the world — Europe will have its fall cushioned by trade surpluses, but the rest of us will be dragged down by the counterpart deficits.

Now, this is not how most analysts approach the problem. They make a forecast for the exchange rate, then run this through some set of trade elasticities to get the effects on trade and hence on GDP. Such estimates currently indicate that the dollar will be a moderate-sized drag on US recovery, but no more. What the economic logic says, however, is that if that’s really true, the dollar will just keep heading higher until the drag gets less moderate.

So, great if you're traveling abroad, as I will be later this spring; bad if you're the United States or United Kingdom and have lots of exports to Europe. I'll be watching this carefully.

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