Never trust the headlines, and always carefully read the full article. A recent headline in The Wall Street Journal claims, Euro Hits Two-Year Low. This headline connotes negativity and panic, but it is impossible to know the truth about the Euro without understanding what the Euro is being measured against. Relative to what did the Euro hit a two year low? This headline could have easily read, “US dollar hits two year high against Euro,” “Euro soars against Russian ruble.” or “Euro is flat against gold after dramatically strengthening last year.”
The economic landscape is often confusing when bombarded with headlines and assessments that lack grounding. One way we simplify the world, especially the world of currency values, it to look at a currency’s value in terms of gold. When one looks at cross rates between two currencies (like Euro/$ or $/Yen) it is impossible to tell which currency is driving the movement of the ratio. Both currencies (both sides of the equation) can be volatile thus masking the important economic phenomenon happening. We prefer to look at each currency measured against something that has a stable value over time due to its unique fundamental and supply characteristics – gold. Since gold’s value is mostly stable over time, when a currency’s gold price moves up or down we are viewing the real value of that currency move. When the dollar price of gold is rising, the US$ is weakening. When the dollar price of gold is falling, the US$ is strengthening. This applies to any currency viewed in gold terms.
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