What Next, the Euro at 50 Cents?
Can airline ticket prices offer insights to currency traders?
September 28, 2000
Despite the recent intervention to prop it up, the euro is still worth less than $0.90. Since the euro’s component currencies (such as the German mark and the French franc) are each fixed in value relative to the euro, the value of these currencies is in lockstep with the euro. And there is more bad news in store: the dollar may still be dramatically undervalued — meaning the euro could fall even further.
Our evidence is based on the admittedly strange pricing policies of major airlines. Try booking a business class flight between, say, New York and Frankfurt. We called the Lufthansa offices in both New York and Frankfurt for price quotes. The New York office quoted us a fare of $5,600.
But when we spoke with the Lufthansa office in Frankfurt, we were quoted a fare of DM5,800 (or €2,760) for the same seat and the same date of travel.
The only catch — we’d have to originate our trip in Frankfurt. Nevertheless, a person flying out of Frankfurt would pay less than half as much as a person flying out of New York would — since, at the current exchange rate, €2,760 equals $2,456.
We had the same experience when we contacted United Airlines. Its New York office quoted a fare of $5,600 for the flight to Frankfurt. In Germany, their quote for a ticket to New York was DM5,400.
This pricing policy by leading airlines suggests that the dollar and the deutschmark should be roughly identical in value. But the deutschmark’s value was irrevocably fixed at €0.51 when the euro was introduced.
Therefore, if the deutschmark and dollar were in fact equal, as The Globalist’s “Airline Currency Index” suggests, one euro should buy $0.51. That is a long way down from the current exchange rate of $0.89 for one euro. Our indicator therefore points to a further 43% depreciation of the euro.
So what does this mean for the future of the euro? Well, New York and Frankfurt are both major financial centers. It is safe to assume that dozens upon dozens of currency traders are flying the friendly skies between the two cities every day. Surely, it can’t be much longer before they too stumble across this puzzling pricing anomaly. Once they figure it out, their already pessimistic view of the euro may get even darker.