The US Dollar and Euro - Essay Example

? Comparative Study of US Dollar and Euro Table of contents Introduction 3 2. US Dollar v Euro – Comparative analysis 3 2 Value of US Dollar compared to Euro 3 2.2 Factors affecting the pair of currencies 6 2.3 Can currencies be forecasted? 7 3. Conclusion 8 References 10 1. Introduction The development of economies of countries worldwide is primarily depended on their potentials to promote their currency in regard to global trade transactions. US Dollar is used for measuring the value of petroleum and gold, goods that are of primarily importance for global economy. Apart from its superior position in markets around the world US Dollar seems as more prepared, compared to other currencies, to face long term economic pressures. Reference is made in particular to Euro, a currency that has challenged the hegemony of US Dollar in global market. Current paper provides a comparative analysis of the two currencies. Emphasis is also given on the factors which have mostly affected the performance of these currencies, especially in regard to 2009 onwards. The financial recession of 2008 and the Euro zone debt crisis, that followed, are used as key events for the evaluation of the potentials of the two currencies in the future. In general, the US Dollar is proved to be stronger both in case of unexpected turbulences and in case of long term economic downturns. 2. US Dollar v Euro – Comparative analysis 2.1 Value of US Dollar compared to Euro The value of US Dollar towards Euro has faced important fluctuations. The turbulences in the global financial market, as related to the Euro Debt Crisis, have led to the decrease of the value of Euro, compared to US Dollar. Indeed, In January 2012 the value of Euro reached the $1.274 (Index Mundi 2012), which is rather low compared to the currency’s value in the past. For example, in January of 2011 the value of Euro was estimated at $1.3371 (Index Mundi 2012). Up to July 2012, the value of Euro towards that of US Dollar was significantly decreased a fact that was related to the continuous deterioration of the Euro Debt Crisis. In July 20 of 2012 the value of Euro reached the $1.2176 (Index Mundi 2012), a quite low level. This fact has caused severe concerns to the leaders of EU. The threat of a potential collapse of the Euro zone had appeared. In order to understand the position of Euro towards the US Dollar it would be necessary to refer to the fluctuations in the value of these currencies for the last four years, i.e. from 2009 up to 2012. In this way, it would be made clear whether the power of the two currencies in the global market is equal or whether one of them is at an advantageous position. During 2009 the value of Euro was decreased at a level of 20%, compared to 2008. The global financial crisis of that period has been probably the key reason for the above phenomenon. At the end of the above year the value of Euro was estimated to $1.43 (Index Mundi 2012). The year that followed, 2010, the value of Euro was further decreased; by the end of 2010 the value of Euro was fell to $1.32 (Index Mundi 2012). Again, the Euro Debt crisis, which has appeared to be more intensive in Greece, has been related to the further limitation of the value of Euro towards that of US Dollar (Index Mundi 2012). During 2011 the distance between the two currencies was further decreased. In the beginning of 2011 the Euro seemed as able to increase its power as a global currency. Indeed, the introduction of effective measures in regard to the Greece debt crisis has caused pressures on US dollar; during the first months of 2011 the US dollar lost a 10% of its value (Index Mundi 2012). At the same time, Euro was strengthened reaching the $1.4675 by July 2011 (Index Mundi 2012). It seems that investors were, still, afraid of investing on US Dollar due to the US Debt crisis of 2008, especially since the above crisis resulted to a global recession. Moreover, it was in that period that the interest rate in the EU was increased to 1.5%, a fact that highly favored the Euro towards the US Dollar. However, as the end of 2011 was approaching the failures of EU officials to identify an effective solution for terminating the Euro zone crisis led to the strengthening of US dollar. Indeed, by the end of 2011 the value of Euro was further decreased reached the $.12973 (Index Mundi 2012). In 2012, Euro has increased its power towards the US Dollar. The specific fact is made clear in the graph presented below (Graph 1). The graph shows the performance of US Dollar compared to Euro Exchange Rate. The initiatives undertaken by the ECB in regard to the EU debt crisis seem to be effective; the position of Euro towards US Dollar has been standardized with trends of increase of the value of Euro towards that of US Dollar. It should be noted that in practice the power of Euro and US Dollar in the international market seems to be equal. Indeed, as mentioned in the study of Lorca-Susino (2010) in 2008 ‘the value of Euros used around the world was estimated to $840 billion compared to $814 billion of US Dollars’ (Lorca-Susino 2010, p.83). This fact shows the buying power of Euro compared to US Dollar. Even if US Dollar is the key currency of trade around the world, its use in daily transactions is lower than that of Euro. 2.2 Factors affecting the pair of currencies Three have been the factors that have mostly affected the performance of both currencies: a) the US debt crisis of 2008, as that crisis led to a global recession, b) the Euro debt crisis that followed and which still continues and c) the significant instability in terms of interest rates, as influenced by the decisions of ECB and of the Federal Reserve Bank of US, has also affected the value of both currencies; at this point it should be noted that the US Dollar has proved to be more vulnerable, compared to Euro, to interest rates fluctuations (Lorca-Susino 2010). In regard to the above, the following remarks would be made: a) the US Debt crisis of 2008 has caused a global recession; this means that the crisis had started in USA but has expanded worldwide, a fact indicating that the US market did not have the full responsibility for the 2008 recession. It is possibly for this reason that the US Dollar has managed to keep its power as a global currency. The 2008 recession started in US but it was related to many markets, at the level that banking and financial practices used in US banks were also used in most banks around the world, especially in developed countries (Cohen 2012). Thus, the US Dollar had to face a strong recession but for a short period of time. It was in the beginning of 2009 that the first signs of recovery of the US economy appeared. In other words, the US Dollar had faced a strong crisis that lasted about a year, from late 2007 to the beginning of 2009; b) on the other hand, the Euro has been placed in the middle of strong turbulences that began in 2009 and are still in progress (Cohen 2012); the Euro debt crisis has been a different case. The specific crisis that started in 2009 has been proved quite difficult to be controlled (Cohen 2012). Initiatives and plans are developed all these years for achieving the termination of this crisis. Still, no signs of improvement of the European economy have appeared. On the contrary, a series of members of the EU have reached a critical point in regard to their financials. The strength of Euro, which manages to keep a balance towards US Dollar, should not be considered as secured. In fact, the value of Euro is negatively affected every time a failure in the meetings for the arrangement of the debts of member states takes place. This fact shows the instability of Euro, as a global currency; c) the ECB has a unique role in keeping the power of Euro in the context of the international market. Indeed, up to now the interventions of ECB for protecting the value of Euro have been proved quite effective (Cohen 2012). In the long term though the measures of ECB in regard to Euro should be reviewed; the increase of interest rates as a tool for keeping the value of Euro high is a strategy that cannot be continued in the long term as it could threaten the stability of the EU market, increasing the prices of exports from EU to third countries. The supporters of Euro have proposed the development of ‘a Euro index’, similar to the ‘US Dollar index’, so that the power of Euro ‘to enhance political and economic integration’ (Lorca-Susino 2010, p.213) is increased. However, such plan has not been applied, at least not yet, due to the lack of support by member states. It is clear that the policies used for the enforcement of Euro would not be based at such practices, at the level that full political and social integration is not achievable while in USA such integration has been completed about two hundred years ago. 2.3 Can currencies be forecasted? When trying to estimate the future performance of currencies there are certain issues that need to be taken into consideration. At a first level, the forecasting of currencies need to be based on a specific process, meaning that particular techniques have to be used so that the assumptions made to be valid. Technical Analysis is the most common technique of such kind. One the key advantage of Technical Analysis, as a forecasting tool, is its potential to reveal the long term trends in regard to a currency’s performance (Cohen 2012). Other techniques for developing an effective forecast of a currency’s future performance may be also employed (Cohen 2012). The research on news published in this field and the reports released by economic institutions are also valuable tools in currencies’ forecasting. Forecasts developed by economists would be also reviewed, since these forecasts highlight critical aspects of currencies’ performance (Cohen 2012). Under these terms, it could be stated that currencies can be forecasted. However, the assumptions made cannot be free from risks at the level that financial markets are, necessarily, related to high risks. For this reason, forecasts prepared in regard to currencies should be only used as indicators and not as key criteria for important economic decisions. 3. Conclusion The level of currencies’ performance worldwide is related to a series of factors. When trying to evaluate the performance of a currency, as compared to other currencies, certain criteria need to be used. At a first level, the comparison should be made between currencies of similar, or at least close, value. This means that the currencies involved should have similar chances to growth. Moreover, the comparison would refer to a particular period of time, preferably the same period of time for both currencies. Then, the use of currencies in the context of global market would be reviewed. Such process has been followed in this paper. The comparative analysis of Euro and US Dollar from 2009 onwards showed that the two currencies had equal chances to achieve a high performance. At the same time, both currencies had to face significant market pressures. US Dollar has been proved stronger, compared to Euro, being able to protect its position in the global market despite the strong recession of 2008. On the other hand, Euro had to face severe turbulences which may not were of the same level as the US Debt crisis of 2008 but they have been longer, as of their duration. In this context, a final assumption in regard to the position of the two currencies would be developed as follows: US Dollar is stronger compared to Euro but the later has been found to be resistant to long term crisis, a condition that has not been tested in regard to the US Dollar. For this reason, US Dollar is proved as being more powerful than Euro but no safe forecasts in regard to its future performance can be developed. References Cohen, B. 2012. The Future of Global Currency: The Euro Versus the Dollar. London: Routledge. Index Mundi . (n.d.). US Dollar to Euro Exchange Rate. Available: http://www.indexmundi.com/xrates/graph.aspx?c1=USD&c2=EUR&days=365. Last accessed 8th November 2012. Lorca-Susino, M., 2010. The Euro in the 21st Century: Economic Crisis and Financial Uproar. Surrey: Ashgate Publishing. Read More