WASHINGTON: If you’ve been thinking about taking a European vacation, it’s almost time to book those tickets. (Well, as long as you weren’t planning on going to Switzerland). That’s because the euro is falling so fast against the dollar — down to $1.15 per euro, from a high of $1.45 a few years ago — that it shouldn’t be long before the two are worth the same amount.

Send your postcards from Paris to Mario Draghi, president of the European Central Bank (ECB), thanking him for the affordable trip of a lifetime.

Sometimes exchange rates are so complicated that it seems as if nobody understands them, but sometimes they’re not. This is one of those times.

Now, the simple story is that, unless the government is keeping it artificially low, the stronger your economy, the stronger your currency.

More growth means more inflation, and more inflation means higher interest rates — which make people want to hold currency that pays them more rather than currency that pays them less. (The slightly more complicated version is that currencies go up when monetary policy is tight and down when it’s loose.

That’s trickier than it sounds, though, because policy can be tight even when interest rates are zero, as in Japan a few years ago, if the economy needs even more help).

What does that have to do with the euro? Easy: The US economy is in a lot better shape than Europe’s right now. US gross domestic product just grew 5 per cent, jobs growth was the best in 15 years, and falling oil prices are putting even more money into people’s pockets.

It’s enough that the Federal Reserve, despite still-low price-and-wage inflation, is expected to start raising interest rates this year or the next.

Europe, meanwhile, is still stuck in a depression worse than that of the 1930s. That’s what happens when you try cutting spending and raising rates, which you then have to cut again, during double-digit unemployment.

The good news, though, is that after years of deflation denial, the ECB finally looks like it’s going to start buying bonds with newly printed euros, also known as quantitative easing.

That seems like an even better bet after Switzerland stopped pegging its currency to the euro, letting the Swiss franc explode in value, because it was afraid that it would have to print too much money to keep up with the ECB.

So, in short, markets think the United States is going to tighten monetary policy and Europe is going to loosen it, which has sent the dollar up and the euro down — all the way down to $1.15 per euro.

Parity shouldn’t be far behind, and then, who knows? The dollar might end up being worth more.

Monetary policy might seem boring, but it’s not when it gets you a cheap trip to Europe.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, January 18th, 2015

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