Finance & economics | Three currencies, two theories, one burger

Dollar-euro parity may be justified. But the yen looks cheap as chips

How to use economic theory to value currencies

Exchange rates for U.S dollars and the Euro currencies are displayed outside a change office Wednesday, July 13, 2022 in Paris. The euro on Tuesday fell to parity with the dollar for the first time in nearly 20 years.(AP Photo/Thomas Padilla)

Jul 21st 2022

Imagine you are a Parisian investor trying to decide whether to buy American or European bonds. You compare the yields on offer. A ten-year bond issued by America’s Treasury today offers 3%; German bunds return only 1.2%. But buying American means taking a gamble on the euro-dollar exchange rate. You are interested in the return in euros. The bond issued in Washington will be attractive only if the extra yield exceeds any expected loss owing to swings in currency markets.

This article appeared in the Finance & economics section of the print edition under the headline “A tale of three parities”