The foreign exchange market is sending a very worrying signal for the Euro Zone economy. Over the past few weeks, the euro, particularly against the US dollar has quietly crept higher, EUR/JPY has shot up in a few weeks to levels not seen since 2008. EUR/USD now threatens to break key levels that would open the door to EUR/USD 1.40, then perhaps 1.50 and beyond. Such development would hurt most European countries and undoubtedly put renewed pressure on the ECB to take even more accommodative measures.
According to some estimates, EUR/USD at 1.50 would prove to be a terrible burden for the peripheral economies, and with a higher euro, no doubt the threat of "deflation" would come back to the fore. With political pressures coming left and right, we could see the European central bank succumb to the quantitative easing temptation. Just recently, IMF's Christine Lagarde (who previously stated there was "no currency war") has demanded more "pre-emptive" action from the ECB. In short, the ECB finds itself in the same bind it was about 10 years ago, when its policy was in part dictated by the Greenspan Fed's ultra low interest rate policy. We all know where that led eventually. Our current problems are a direct consequence of what happened then.
Despite the recent comeback of taper talk among Fed officials which one could argue should have supported the dollar, the market has spoken differently. I for one see these recent Fed musings as more evidence that the FOMC has lost credibility. Confusion reigns on how to exit this corner the Fed has painted itself into, and this with the appointment of ultra-dove Janet Yellen as new Chairman has turned out to be bad for the US Dollar. Quite simply there is no exit in sight for the easy money policies of the Fed, any taper talk is counterbalanced by an absence of a strong commitment to a taper roadmap and assurances zero interest rates will be there for years to come. So it's no surprise the US Dollar Index appears to be on the verge of a breakdown, and while the yen continues its collapse as speculation on a lower yen reaches multi-year highs, AUD and NZD are showing signs their recent downtrend has stalled. The british pound is also bumping against multi-year highs against the dollar. Another factor has also played into euro strength, Europe is back in favor among US investors who have snapped up European stocks in recent months.
The bottom line is that the Fed's confused policy is becoming very unhelpful for the European economy. BOJ yen manipulation (let's call a spade a spade) having driven the yen ever lower with the help of speculators, other countries will feel the need to take this race to the bottom to new levels. Instead of putting pressure on the ECB, policy makers should be putting pressure on the new Fed to finally show a clear path out of quantitative easing. The example has been set by Mr Zoellick former head of the World Bank :
http://www.cnbc.com/id/101260151 
This chart should prompt Mario to pick up his phone for a serious talk with Janet .
