Dollar-euro parity may be justified. But the yen looks cheap as chips
How to use economic theory to value currencies
Imagine you are a Parisian investor trying to decide whether to buy American or European bonds. You compare the yields on offer. A ten-year bond issued by America’s Treasury today offers 3%; German bunds return only 1.2%. But buying American means taking a gamble on the euro-dollar exchange rate. You are interested in the return in euros. The bond issued in Washington will be attractive only if the extra yield exceeds any expected loss owing to swings in currency markets.
This article appeared in the Finance & economics section of the print edition under the headline “A tale of three parities”
Finance & economics July 23rd 2022
- The 53 fragile emerging economies
- How American banks are responding to rising interest rates
- Dollar-euro parity may be justified. But the yen looks cheap as chips
- Is China facing an energy crunch, too?
- Fresh woe for China’s property sector: mortgage boycotts
- The Fed put morphs into a Fed call
- Should central banks’ inflation targets be raised?
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