European union predicts stagflation – what is the effect on euro and dollar?
Teddy Carlos
Apr. 28, 2008

European Union says Europe was far from a recession, even as it noted that global trade is slowing markedly and the U.S. is on the brink of a major recession that would hurt exporters. How ever, it says very clearly that the inflation is rising rapidly and growth is slowing generating the worst fear of stagflation. According to EU, euro-zone economic inflation would surge more than expected this year as growth slows down from a recent boom.

The effect on US Dollar and Euro currency can be dramatic. The US Dollar so far went down in valuation because of stagflation in US. But it seems now that Eurozone is joining the bandwagon of stagflation hit regions.

The worst thing that can happen to a currency is the effect of stagflation. Rising prices depresses the currency. The central bank cannot raise the interst rate adequately for the stagnating economy.

A lower valued currency with less than appropriate interest rate is the recipe for disaster for any currency. Once the deflation hits (after stagflation), the currency moves up.

US Dollar is ready to move up sharply and Euro is ready to drop like a ball.

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