Ask Terry Questions Negative interest rates in Europe

Negative interest rates in Europe

By Terry Savage on July 30, 2019 | Wild Card

As a matter of curiosity, why wouldn’t a European saver (say, in Germany) buy US Treasury bills/notes at c. 2% instead of parking their funds at a negative rate in their own country’s bonds?
A mattress pays higher interest (zero) than a German government bond.
Best wishes, Joe

Terry Says

Good question and a simple answer: Because one Euro does not consistently equal the same value in dollars!  When the dollar is “stronger”  (and it has been getting stronger against the Euro because of our higher interest rates), then it takes more Euros to buy one dollar.  When you translate out of dollars back into Euros at the end of  your CD term, you’ll get back fewer Euros!  The free global trading market constantly adjusts for changing interest rates, adjusting the exchange rate for the two currencies.

A strong dollar (because of money coming here to buy dollars because of our higher rates) means one dollar can buy a lot more European “stuff” in Euros (until Mercedes raises prices!).  But it makes US goods more expensive. (Europeans need to gather more Euros to buy one dollar’s worth of stuff.)  And that’s bad for our manufacturers.  Free markets sort it all out.  Tariffs trying to keep their “cheap” stuff out merely hurt our consumers!  And yes, this is more than you asked.  Consider it your Econ 101 lesson for today!



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