Whither the Euro?

The movements of the Euro over the last weeks have been puzzling. It hit 1.60 to the dollar, then plunged to 1.53 before having a bit of a bounceback. This is high volatility in a major currency and small changes in currencies have very large consequences in the real world.

MacroMan asked: Now, what’s peculiar is that the euro was essentially frog-marched up to 1.60 by central bank demand….but since then has been sold off aggressively, with some of the same names that had previously been buying cited as the sellers. This has led Macro Man and others to speculate: has Voldemort [i.e., the People's Bank of China](and others) fallen out of love with the euro?

So, all the more surprising to find this story by Keith Bradsher in the NYT:

Facing the double-barreled threat of a falling dollar and weakening American demand, some Chinese exporters are starting to ask European customers to pay in euros….Drastic times call for drastic measures. The dollar’s fall against China’s currency has been accelerating — it is down 4 percent so far this year, after dropping 7 percent last year. That has left businesses across China nursing losses and trying to figure out how to raise prices for overseas buyers, Chinese executives and sales representatives said

My guess is that the Chinese government realized that the strength of the Euro, caused by their purchases, were starting to gripe the Europeans enough to threaten retaliation, so they switched to accumulating reserves in dollars, taking the losses of a weakening dollar. Interestingly, the yen also started strengthening a little bit about this time. So, perhaps they are diversifying into yen, a move that would also help them compete against Japanese exporters.