Tuesday, May 29, 2007

Increasing Reasons to be Bullish About the Euro

The current account balance of the Euro zone turned positive again after having been negative in 2005 and 2006. This may perhaps appear somewhat puzzling given the fact that the Euro zone is in a cyclical boom and the fact that the Euro have been so strong.

The explanation for this is in part the fact that oil prices (and therefore the cost of oil import) are much lower than last year (particularly in euro terms) and also the German tax reform which effectively shifted taxation from exports to imports. The shift in the Euro zone current account balance is basically entirely a result of Germany's soaring surplus.

The fact that the current account balance is strengthening while domestic interest rates are rising are good reasons to be bullish about the euro.


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