How did the Euro get stronger then the dollar?

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Stefano C

IN the USA, the economy is suffering, and Federal deficit has grown faster than the growth of GNP (due to tax cuts, the Iraq war, etc.). The Fed is issuing more dollars to contain the deficit and help the economy.

Meanwhile, in the EU countries economy (less based on customer demand) has suffered less. The governments agreed to contain their deficit within 3% of their GNP. The European Central Bank is not issuing large amount of Euros.

If something is available in quantity (the US dollar), it is priced less that something that is less available (the Euro).

cjain

The de-facto world reserve currency refers to a currency in which the majority of international transactions take place.

Since the time after the Second World War, the de facto world currency has been the United States dollar. During that war, the U.S. provided support, medical help and ammunitions to its allies, demanding gold payments in exchange. By then, the Bretton Woods agreement was established by which banks of issue were required to redeem their currency in gold bullion or in U.S. Dollar- which in turn were redeemable in gold bullion at the rate of $35/troy ounce (1 troy ounce = 31.1034768 g). After the war ended in 1945, bulk of the worldâ€™s gold was lying in the U.S. vaults. Henceforth, the dollar became the undisputed global reserve currency. Some countries like Ecuador, El Salvador, and Panama have gone a step further and eliminated their own currency in favour of U.S. Dollar.

The United States took advantage of this fact and printed dollars in huge quantity. It exported large chunks of dollars, paying for commodities, tax cuts, wars abroad, spies and politicians world over. This measure could not affect the inflation back home. It got it all for a free!! Outside U.S., 2/3rd of most of the reserves of the other countries is in U.S. dollars. In 1971, when some countries tried to sell their dollars in return for gold, U.S. defaulted on its payment and the Bretton Woods Agreement was smashed. To regain the trust of the world in the paper dollar, U.S. bullied OPEC to sell oil in dollars only. Now the countries had to keep the dollars to buy the much-needed oil. Oil replaced gold as the foundation to stop dollar from sinking.

But, in late 1999, Euro was established and months later, Iraq announced that thereafter it would sell oil in euros only. Then, the U.S. for obvious reasons invaded it. In 2004, Iran proposed the setting up of an oil bourse to sell oil in euros only. India and China have also supported this decision. It makes sense for Europe and Japan too, to buy and sell oil in euros as the euro is far more stable than the debt-ridden dollar.

The world would now have to start stalking up euros and sell back dollars. But the U.S. canâ€™t accept even 1/10th of the worldâ€™s dollars as its economy would crash. What would happen to U.S. then? A re-run of Germany post 1929?

JeEv

The most basic answers would be the economic trends that have befallen both the EU (European Union) and the USA respectively. In the USA, the Great Depression was rectified (to an extent) by an expansionary (growth) policy of FDR, including several of the New Deal Programs, that increase employment opportunity and circulated more money into the economy.

It is perhaps most important to note that the international price of currency is based on the amount of physical money in circulation, and its respective demand in other nations. Since there are many US-Dollars in circular (moreso than European Euros) the demand is less, and thus the value is less. The Euro is in more scarse supply, leading to higher demand and higher value on the market.

However, economics is not as simple as demand and supply. The US has done relatively little to rectify their falling dollar, instead using the lower price to benefit as a government. With the dollar being low, more nations are inclined to purchase theri goods. Let's say Japan needs 100 Yen to have 1 dollar of value in the US, but 200 Yen to have 1 Euro in Europe. On a grander scheme, it will be more efficient for Japan to trade with the US because their money (Or Purchasing Power) goes farther.

It's not a simple answer that can be answered in a paragraph, or even a page, but the I'll sum up the main points: The US (as an economy) pursued an expanding policy, bringing more physical dollars into the marketplace than the European Euro. Since there are more dollars (percentage of the country's worth) than Euros, each dollar represents a smaller and smaller amount of the country's wealth. Since Europe didn't pursue such expansionary policies, they have less currency that is worth more.

Hope that helped, as confusing as it may sound.

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