Monetary and economic developments January 2017

With an USD / EUR exchange rate of USD / EUR 1.08, the euro reached on Wednesday afternoon a high level this year. To the franc, the dollar remains stable at around 0.99 CHF per 1 USD.

This development appears to be a reaction to President Trump's statements. According to those, the common European currency is believed to be clearly under valuated, which gives exporting countries of the Eurozone, such as Germany, a significant advantage. The administration of Donald Trump is pursuing a new policy for foreign trade, with imports to be greatly reduced and exports to be increased in order to address the negative trade balance. In external communication, the main focus is on import tax from other countries and the replacement of multilateral trade agreements by bilateral trade agreements. The price of the US dollar could have a less debated but even more decisive role to impact the trade balance.

A weak dollar would support this policy from below, and by making American products more competitive on international markets. So far, the US administration has been talking about the undervaluation of other currencies. However, whether concrete measures are taken to weaken their own currency remains open. The possibilities for this are however limited because the interest rates are already low.

Trump could, however, take an example of the policy of the European Central Bank and, in addition to low interest rates, start to provide the markets with additional money and thus influence a weaker dollar and stronger inflation.

In the euro area, inflation rose sharply in January. On average, the prices were 1.8% higher than in January a year ago, and thus the Euro Zone has recorded the biggest inflation jump in years. It is now approaching the ECB's objective of 2%. Taking this in consideration will Mario Draghi adjust his monetary policy that he has been following until now? Probably not. The current jump in inflation is mainly due to the rise in the price of petroleum, and therefore has no structural change as a cause.

The situation on the labor market in the EU is also positive, driven mainly by Germany, where the unemployment rate is below 5%. The economy developed in the euro area as expected by 0.5% in the last quarter of 2016.