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More Headwinds for the Euro

Tuesday, 19 Feb 2013 | 1:23 PM ET
A worker is seen at the production line in the Mercedes-Benz factory of the Daimler AG in Sindelfingen, southwestern Germany.
Thomas Kienzle | AFP | Getty Images
A worker is seen at the production line in the Mercedes-Benz factory of the Daimler AG in Sindelfingen, southwestern Germany.

A new Germany survey of economic sentiment is showing that expectations are stronger than they have been since April 2010. So happy days are here again, right?

Not so fast.

"What has been largely overlooked is a collapse of auto sales throughout Europe," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. Germany, Europe's largest auto market, saw sales drop more than 8 percent, while France, Italy, and several other countries saw sharper drops. Greek auto sales fell by more than a third.

It's tempting to blame the downturn on a weak yen, which theoretically makes Japanese cars relatively less expensive, but Chandler isn't biting.

"The price of money adjusts much faster than the price of goods," he pointed out. Also, a number of foreign automakers produce their cars locally, reducing the impact of currency fluctuations, and many of the costs of imports—transportation, storage, marketing—are domestic, he said.

The economic impact is starting to appear, with Ford idling three European plants to adjust to the falling consumer demand.

"If companies follow Ford's example, and we see little reason for them not to, more plant closing and industry rationalization will act as another head wind on the regional economy," Chandler warned.

This can't be good news for the euro, especially at a time when other countries are lowering interest rates in an attempt to stimulate their economies.

As Bette Davis said, fasten your seatbelt. It's going to be a bumpy night.

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